Two projects being considered are mutually exclusive and have the following projected cash flows:

If the required rate of return on these projects is 10%,which would be chosen and why?
A) B, because of higher NPV.
B) B, because of higher IRR.
C) A, because of higher NPV.
D) A, because of higher IRR.
E) Neither, because both have IRRs less than the cost of capital.

Question

Two projects being considered are mutually exclusive and have the following projected cash flows:

If the required rate of return on these projects is 10%,which would be chosen and why?
A) B, because of higher NPV. 
B) B, because of higher IRR. 
C) A, because of higher NPV. 
D) A, because of higher IRR. 
E) Neither, because both have IRRs less than the cost of capital.

Quizplus · Accepted Answer

Project A can be solved like an annuity, so:
NPV = PMT 11ea7fdb_fbe2_c77d_a768_ed03da81378b_TB2902_11 - Initial Investment
NPV = 15,625 11ea7fdb_fbe2_c77e_a768_4502ce18b029_TB2902_11 - 50,000 = $9,231.04
Project B:
NPV = 11ea7fdb_fbe2_c77f_a768_197c174f80b9_TB2902_11 11ea7fdb_fbe2_c780_a768_ddc32e92a3a9_TB2902_11 - Initial Investment
NPV = 11ea7fdb_fbe2_ee91_a768_2306727aaf29_TB2902_11 - 50,000 = $11,781.67

Two Projects Being Considered Are Mutually Exclusive and Have the Following