Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project?
A) The net present value indicates accept while the internal rate of return indicates reject.
B) Payback indicates acceptance.
C) The payback decision rule could override the accept decision indicated by the net present value.
D) The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision.
E) The net present value decision rule is the only rule that matters when making the final decision.

Question

Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project?
A) The net present value indicates accept while the internal rate of return indicates reject. 
B) Payback indicates acceptance. 
C) The payback decision rule could override the accept decision indicated by the net present value. 
D) The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision. 
E) The net present value decision rule is the only rule that matters when making the final decision.

Quizplus · Accepted Answer

The NPV indicates that the project should be accepted, while the IRR is greater than the required return which also indicates acceptance. However, the payback period is longer than the required period, which may cause concerns for liquidity or other reasons. Therefore, the payback decision rule could override the accept decision indicated by NPV and IRR in this case.

Western Beef Exporters Is Considering a Project That Has an NPV