Question

Facebook is considering an expansion of their Whats App system, and the CFO and her financial team have estimated and calculated the NPV of the cash flows of two independent projects. One project is in Indianapolis, and has a NPV of $200,000 and an Modified IRR of 12%, while the second project is in San Diego has a positive NPV of $222,000 and a Modified IRR of approximately 13%. The CFO says she is comfortable that a 10% return over the life of the projects is an appropriate return for the risks undertaken. What do you recommend the CFO propose to the company's Board of Directors?

A. Don't do either project as the returns are not compelling.

B. Approve both the Indianapolis and the San Diego projects.

C. Approve only the San Diego project because it has the higher NPV.

D. Approve only the Indianapolis project because it has the higher Modified IRR.

Answer 1

B. Approve both the Indianapolis and the San Diego projects.

As the project are independent and both have positive NPV and cost of capital is less than MIRR