A company estimates that its required rate of return is 16 percent. Which of the

Question

A company estimates that its required rate of return is 16 percent. Which of the following projects should the company accept, if all these projects are independent?

:

Project A requires an initial investment of $2,000,000 and generates a NPV of $58.

Project B has an IRR of 15.5 percent.

Project C requires an initial investment of $1,000,000 and generates an IRR of 16 percent.

None of the above.

Project A requires an initial investment of $2,000,000 and generates a NPV of $58.

Project B has an IRR of 15.5 percent.

Project C requires an initial investment of $1,000,000 and generates an IRR of 16 percent.

None of the above.

Explanation / Answer

Project A requires an initial investment of $2,000,000 and generates a NPV of $58.

Explanation: The project has a positive NPV while in other cases IRR is either less or equal to required rate of return. We must choose the project with a higher NPV should be chosen because there is an inherent reinvestment assumption

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