Question

You are a financial analyst for Green Country Products, Inc. You are evaluating two different capital budgeting proposals. However, because the proposals are mutually exclusive, Green Country can only accept one of them. You must determine which of the proposals is better and should be adopted. The following table provides Green Country’s cost of capital (i.e., discount rate), net present value (NPV), and internal rate of return (IRR) for the two proposals. Which proposal should be selected?

	Project A	Project B
NPV	$ 1.85 million	$ 2.25 million
IRR	18.0%	16.5%
Discount Rate	14.0%	14.0%

Group of answer choices

Choose Project A because it has the greater IRR.

Choose Project B because it has the greater NPV.

Calculate the profitability index (PI) and choose the project that is favored by two of the decision criteria (i.e., best two out of three)

None of these are correct.

Answer 1

As projects are mutually exclusive, NPV is the best method to judge which project to be selected.

Here Project B has higher NPV so it is to be selected.

NPV shows how much wealth is added for the shareholders, so it is the best method.

Answer : Choose Project B because it has the greater NPV. (Thumbs up please)