Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics: If the firm's required rate of return (r) is 10 percent, which project should be purchased?
A) Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return.
B) Neither project should be accepted, because the IRRs for both projects exceed the firm's required rate of return.
C) Project Q should be accepted, because its net present value (NP
V) is higher than Project R's NPV.
D) Project R should be accepted, because its net present value (NP
V) is higher than Project Q's NPV.
E) None of the above is a correct answer.

Question

Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics:  If the firm's required rate of return (r) is 10 percent, which project should be purchased?
A) Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return. 
B) Neither project should be accepted, because the IRRs for both projects exceed the firm's required rate of return. 
C) Project Q should be accepted, because its net present value (NP
V) is higher than Project R's NPV. 
D) Project R should be accepted, because its net present value (NP
V) is higher than Project Q's NPV. 
E) None of the above is a correct answer.

Quizplus · Accepted Answer

The best choice is to accept Project Q because it has a higher net present value (NPV) than Project R. NPV is a better criteria for capital budgeting decisions when evaluating mutually exclusive projects than the internal rate of return (IRR) because it takes into account the time value of money and the initial investment. Moreover, both projects have an IRR lower than the firm's required rate of return, which means that they are not generating enough return to cover the cost of capital.

Tara Is Evaluating Two Mutually Exclusive Capital Budgeting Projects That