Question

A firm is considering two mutually exclusive projects with equal lives, Project A has an NPV of $100,000, an IRR of 12%, and a payback period of 3.1 years. Project B has an NPV of $120,000, an IRR of 14%, and a payback period of 2.8 years. The firm should choose________. Question 34 options:

1) Project A because its NPV is higher than Project B's

2) Project A because its payback period is longer than Project B's

3) Project B because its IRR is higher than Project A's

4) Project B because its payback period is shorter than Project A's

5) Both projects

Answer 1

A firm is considering two mutually exclusive projects with equal lives, Project A has an NPV of $100,000, an IRR of 12%, and a payback period of 3.1 years. Project B has an NPV of $120,000, an IRR of 14%, and a payback period of 2.8 years. The firm should choose________. Question 34 options:

Answer :

3) Project B because its IRR is higher than Project A's

4) Project B because its payback period is shorter than Project A's

1) Project A because its NPV is higher than Project B's

2) Project A because its payback period is longer than Project B's

3) Project B because its IRR is higher than Project A's

4) Project B because its payback period is shorter than Project A's

5) Both projects

Reason

1. Project A because its NPV is higher than Project B's

This statement is wrong Project B has higher NPV

2. Project A because it’s payback period is longer than Project B's

This statement is wrong, in case of 2 mutually exclusive projects as per payback period method we need to choose project with shorter payback method.

3. Project B because its IRR is higher than Project A's

This statement is correct in case of 2 mutually exclusive projects we need to select project with highest IRR

               

4. Project B because its payback period is shorter than Project A's

This statement is correct, in case of 2 mutually exclusive projects as per payback period method we need to choose project with shorter payback method.

5. Both projects

Mutually Exclusive project refer to a set of projects out of which only one project can be selected for investment. If one project is selected other projects are rejected. We can only select one project.