Project A has an NPV of $20,000 and a PI of 1.2.Project B has an NPV of $10,000 and a PI of 1.3.Both projects have equal lives.Which project should be preferred if we are NOT concerned with capital rationing (that is,we are NOT concerned with being short of funds)?
A)We should prefer Project B since it has a higher PI.
B)We should compute the EAA before we make any decision.
C)We should prefer Project A since it has a higher NPV.
D)We should prefer Project B if it has a higher IRR.

Question

Quizplus · Accepted Answer

When we evaluate mutually exclusive projects that have different sizes or upfront investments, the NPV is a better measure of profitability. Therefore, we should prefer Project A because it has a higher NPV ($20,000 vs $10,000) even though it has a lower PI. The PI measures the amount of value created per dollar invested, while the NPV measures how much value is created after accounting for the cost of capital. Since we are not concerned with capital rationing, we should choose the project that generates the most value, which is Project A. Option B is not necessary since the projects have equal lives. Option D is incorrect because we cannot compare IRRs to choose between mutually exclusive projects.

Project a Has an NPV of $20,000 and a PI