corporate finance & Accounting 1. You complete an analysis of a new project, and
ID: 2533069 • Letter: C
Question
corporate finance & Accounting
1. You complete an analysis of a new project, and the NPV is $1. You recommend that the project be accepted. Your coworker from marketing argues that the project should not be accepted because the NPV of $1 isn't enough of a profit. Assuming the discount rate is indeed conservative, how do you respond in the following scenarios? Which project(s) should be accepted or rejected? a. There are not any other mutually exclusive projects b. Your coworker has an idea for another mutual exclusive project. You calculate the NPV of the new project to be $2 c. Your coworker has an idea for another project. You calculate that the NPV of the new project is $2. The projects are not mutually exclusive.Explanation / Answer
1.a. Project should be accepted, as NPV is greater than $ 0, and there are no competing mutually exclusive projects.
b. The mutually exclusive project with NPV of $ 2 should be accepted. In case of mutually excllusive projects, the project with the highest NPV should be selected, to the exclusion of the competing projects. This means that when a project is selected, all other projects are rejected.
c. If the projects are not mutually exclusive, i.e if they are independent, all the projects with NPV > 0 should be accepted, provided that the investing firm has enough funds, else capital rationing may be resorted to.
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