The Canadian Division manager is choosing between two mutually exclusive projects. 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?
$\begin{array}{lrr}&\text { Project } 123&\text { Project } 456\
\text { Net present value } & \$ 235,000 & \$ 210,000 \
\text { Internal rate of return } & 14 \% & 16 \%
\end{array}$

Question

Quizplus · Accepted Answer

Given the assumption that cash inflows can be reinvested at the rate of 13%, the manager will likely choose the project with the higher Net Present Value (NPV), which is Project 123, despite Project 456 having a higher Internal Rate of Return (IRR). This is because NPV is a more reliable measure when the reinvestment rate assumption aligns with the company's required rate of return.

The Canadian Division Manager Is Choosing Between Two Mutually Exclusive