Table 12.6
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent.
-Which project should be chosen on the basis of the normal NPV approach? (See Table 12.6)
A) Project A because its NPV is higher
B) Project B because its NPV is higher
C) Project A because its IRR is higher
D) Project B because its IRR is higher

Question

Table 12.6
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. 
-Which project should be chosen on the basis of the normal NPV approach? (See Table 12.6)
A) Project A because its NPV is higher 
B) Project B because its NPV is higher 
C) Project A because its IRR is higher 
D) Project B because its IRR is higher

Quizplus · Accepted Answer

In the normal NPV approach, we calculate the present value of all cash inflows and outflows of each project and deduct the initial investment to find the net present value. Project A has a NPV of -$2,771, while project B has a NPV of $303. As project B has a positive NPV, it should be chosen over project A. The IRR approach is not necessary to determine the better project in this case, as the normal NPV approach already shows project B as the better option.

Table 12.6 Yong Importers, an Asian Import Company, Is Evaluating Two Mutually