Question

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an IRR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an IRR of 9.22 percent. The firm’s cost of capital is 9.15 percent and required payback period is 2.8 years. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?

	A.	Accept Project A and reject Project B because Project A has higher IRR
	B.	Accept Project A and reject Project B because Project A has shorter payback period
	C.	Accept both projects because both NPVs are positive.
	D.	Accept Project B and reject Project A because Project B has higher NPV

Answer 1

Since the projects are mutually exclusive, only one project can be accepted

The answer is

D. Accept Project B and reject Project A because Project B has higher NPV

Since payback period and IRR is being met by both, Project with higher NPV must be selected for higher value addition