Assume the projects are mutually exclusive, that they have equal lives and equal

Question

Assume the projects are mutually exclusive, that they have equal lives and equal risk, and that the firm does not face financial (or other) constraints. Assume also that the appropriate cost of capital is 10%.
A B
IRR 18% 27%
NPV @ 10% $1,665 $1,601

Payback 7 years 4 years

Profitability Index 1.67 2.00

Assuming the cash flows for projects A and B are normal (i.e., a series of negative cash flows is followed by a series of positive cash flows), which project should the firm accept and why?
a. Both A and B
b. A, but not B, because the IRR may have multiple solutions.
c. A, but not B, because A adds more value to the firm than B.
d. A, but not B, because A costs less than B.
e. A, but not B, because the appropriate re-investment rate assumption is more realistic for A than for B.
f. B, but not A, because B’s earlier payback will free up cash needed for other projects.
g. Answers C and E are the only correct answers
h. Answers C through F are all correct

Explanation / Answer

Correct Answer is
g. Answers C and E are the only correct answers

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