Two projects being considered by a firm are mutually exclusive and have the following projected cash flows: Based only on the information given,which of the two projects would be preferred,and why?
A) Project A,because it has a shorter payback period.
B) Project B,because it has a higher IRR.
C) Indifferent,because the projects have equal IRRs.
D) Include both in the capital budget,since the sum of the cash inflows exceeds the initial investment in both cases.
E) Choose neither,since their NPVs are negative.

Question

Two projects being considered by a firm are mutually exclusive and have the following projected cash flows:  Based only on the information given,which of the two projects would be preferred,and why?
A) Project A,because it has a shorter payback period. 
B) Project B,because it has a higher IRR. 
C) Indifferent,because the projects have equal IRRs. 
D) Include both in the capital budget,since the sum of the cash inflows exceeds the initial investment in both cases. 
E) Choose neither,since their NPVs are negative.

Quizplus · Accepted Answer

The preferred project should have a higher IRR as it represents a higher return on investment. Project B has an IRR of 16.5% which is higher than Project A's IRR of 14.0%. Therefore, Project B should be chosen over Project A.

Two Projects Being Considered by a Firm Are Mutually Exclusive