Project A has a $5,000 net present value at a zero discount rate and an internal rate of return of 12%.Project B has an $8,000 net present value at a 0% discount rate and an IRR of return of 10%.If the projects are mutually exclusive,which one should be chosen?

Question

Quizplus · Accepted Answer

Since the projects are mutually exclusive, only one can be selected. Project selection should be based on the project with the highest net present value at a given discount rate. At 0% discount rate, Project B has a higher net present value of $8,000 compared to Project A's $5,000. Therefore, Project B should be chosen. However, if the cost of capital is greater than the crossover point (the discount rate at which the net present values of both projects are equal), then Project A should be chosen instead.

Project a Has a $5,000 Net Present Value at a Zero