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

Since the company requires a 12% minimum return, the manager must choose the project with a higher net present value (NPV) based on a discount rate of 12%. Therefore, the project with a higher NPV at 12% is the best choice, which is likely to be Project B. Reinvesting cash inflows at 12% is the cost of capital or hurdle rate, which means that future cash flows will be discounted to the present at 12% per year.

A Division Manager Is Choosing Between Two Mutually Exclusive Projects