Two investments, C and D are being evaluated. They are mutually exclusive. Inves
ID: 2713043 • Letter: T
Question
Two investments, C and D are being evaluated. They are mutually exclusive. Investment C has a higher NPV using any discount rate between zero and 9%, while D has a higher NPV using any discount rate between 9.1% and 15%. Which investment do you recommend the company undertake? The cost of both opportunities is the same. Which of the following is the BEST answer?
Recommend C if the required return is between zero and 9 percent.
Recommend C if the required return is between 9.1% and 15%.
Recommend C.
Recommend D.
1 points
QUESTION 9
Capital rationing is described as:
Selecting only the one opportunity with an expected return greater than the required return by the largest spread.
Being allocated exactly enough capital to undertake all value creating opportunities.
Having less capital than could be invested in value creating opportunities.
Having as much capital as can be profitably investment in value creating opportunities.
a.Recommend C if the required return is between zero and 9 percent.
b.Recommend C if the required return is between 9.1% and 15%.
c.Recommend C.
d.Recommend D.
Explanation / Answer
Option A is correct.
When the projects are mutually exclusive, we choose one of them based on their NPV. We tend to select the project with higher NPV, since project C has higher NPV when discount rate is in between 0% to 9%, we will choose project C if the cost of capital falls in this range.
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