A firm is evaluating two investment proposals. The following data is provided for the two investment...
A firm is evaluating two investment proposals. The following data is provided for the two investment alternatives.
|
Initial cash outflow |
IRR |
NPV(wacc=18%) |
|
|
Project 1 |
$600 million |
25% |
$100m |
|
Project 2 |
$200 million |
40% |
$20m |
If the two projects are mutually exclusive, which project should the firm choose? What is the problem that the firm should be concerned with in making this decision?
Question 3 options:
|
Project 2; differences in scale |
|
|
Project 1; differences in discount rate |
|
|
Project 1; differences in scale |
|
|
Project 2; differences in discount rate |
Homework Answers
If the two projects are mutually exclusive
Project 1 should be accepted as it has higher NPV,
What is the problem that the firm should be concerned with in making this decision
Differences in scale,
The difference in the initial investment required for both the projects is very large.
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