The Canadian Division manager is choosing between two mutually exclusive projects. $$\begin{array} { l r r }
& \text { Project } 123 & \text { Project } 456 \
\text { Net present value } & \$ 235,000 & \$ 210,000 \
\text { Internal rate of return } & 14 \% & 16 \%
\end{array}$$ The company requires any project to earn at least 13%.The manager believes that cash inflows from the project can be reinvested at the rate of 13%.Which project will the manager likely choose?

Question

The Canadian Division manager is choosing between two mutually exclusive projects. $$\begin{array} { l r r } 
& \text { Project } 123 & \text { Project } 456 \
\text { Net present value } & \$ 235,000 & \$ 210,000 \
\text { Internal rate of return } & 14 \% & 16 \%
\end{array}$$ The company requires any project to earn at least 13%.The manager believes that cash inflows from the project can be reinvested at the rate of 13%.Which project will the manager likely choose?

Quizplus · Accepted Answer

The manager will likely choose Project 123 because it has a higher net present value (NPV) of $235,000 compared to Project 456's NPV of $210,000. The NPV is a more reliable measure when comparing mutually exclusive projects, especially when the reinvestment rate is assumed to be the company's required rate of return (13%).

The Canadian Division Manager Is Choosing Between Two Mutually Exclusive