A division manager is choosing between two mutually exclusive projects. The company requires any project to earn at least 12%. The manager believes that cash inflows from the project can be reinvested at the rate of 12%. Which project will the manager likely choose?

Question

A division manager is choosing between two mutually exclusive projects.  The company requires any project to earn at least 12%. The manager believes that cash inflows from the project can be reinvested at the rate of 12%. Which project will the manager likely choose?

Quizplus · Accepted Answer

The manager should choose Project A, as it has a higher net present value (NPV) at the required rate of return of 12%. This means that the cash inflows from Project A are worth more in today's dollars, compared to the cash inflows from Project B. Since the manager believes that the cash inflows from either project can be reinvested at a rate of 12%, it makes sense to choose the project that has the highest NPV at that rate. Project B's NPV is lower than Project A's NPV at the required rate of return, so it is not the best choice.

A Division Manager Is Choosing Between Two Mutually Exclusive Projects