You are considering the following two mutually exclusive projects.The required return on each project is 14 percent.Which project should you accept and what is the best reason for that decision?
A)Project A, because it pays back faster
B)Project A, because it has the higher profitability index
C)Project B, because it has the higher profitability index
D)Project A, because it has the higher net present value
E)Project B, because it has the higher net present value

Question

You are considering the following two mutually exclusive projects.The required return on each project is 14 percent.Which project should you accept and what is the best reason for that decision? 
A)Project A, because it pays back faster 
B)Project A, because it has the higher profitability index 
C)Project B, because it has the higher profitability index 
D)Project A, because it has the higher net present value 
E)Project B, because it has the higher net present value

Quizplus · Accepted Answer

Payback has several flaws and is not the best method of comparison.The profitability index should not be used to evaluate mutually exclusive projects.The decision should be made based on net present value.

You Are Considering the Following Two Mutually Exclusive Projects