Project A has a net present value of $1,500, a payback period of 2 years, and an
ID: 1174466 • Letter: P
Question
Project A has a net present value of $1,500, a payback period of 2 years, and an internal rate of return of 12%. Project B has a net present value of $1,800, a payback period of 4 years, and an internal rate of return of 10%. Project C has a netpresent value of $1,750, a payback period of 3 years, and an internal rate of return of 11%. If the projects are mutually exclusive, which project should be undertaken?
Project A because it has a higher IRR than the other two projects and pays back in the shortest period of time.
Project C because it has an NPV that is only slightly less than that of Project B and offers a higher IRR and a shorter payback period than Project B.
Project B and Project C are equally acceptable since each would increase firm value by the same amount.
Project B because it has the highest NPV of the three projects.
A.Project A because it has a higher IRR than the other two projects and pays back in the shortest period of time.
B.Project C because it has an NPV that is only slightly less than that of Project B and offers a higher IRR and a shorter payback period than Project B.
C.Project B and Project C are equally acceptable since each would increase firm value by the same amount.
D.Project B because it has the highest NPV of the three projects.
Explanation / Answer
Answer: -
Project with Lowest PAYBACK PERIOD and Highest IRR should be always a choice of an investor.
Project-A: NPV: $1500, Payback: 2 years, IRR: 12%
Project-B: NPV $1800, Payback: 4 years, IRR: 10%
Project-C: NPV-$1750, Payback: 3 years, IRR: 11%
All Projects are Mutually Exclusive.
Option-B, Option-C and Option-D are not correct as they are comparing Project B and Project C and nothing about Project-A which is an eligible project among three.
Hence, from given option Option-A is correct as it has highest IRR and other 2 projects and payback in shortest period of time.
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