Question text Johnson Mirrors is facing the possibility of two mutually exclusiv

Question

Question text Johnson Mirrors is facing the possibility of two mutually exclusive projects. They have determined that the required rate for similar projects is 11.7 percent. Project A has an internal rate of return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent. Given this information, which one of the following statements is correct? Select one:

a. Project A should be accepted as its IRR is closer to the crossover point than is Project B's IRR.

b. Project B should be accepted as it has the higher IRR.

c. Both projects should be accepted as both of the project's IRRs exceed the crossover rate.

d. Neither project should be accepted since both of the project's IRRs exceed the crossover rate.

e. You cannot determine which project should be accepted given the information provided.

Explanation / Answer

Answer :

In case IRR of the project is more than the cost of capital of the projet(required rate of return), then project should be selected.

If projects are independent feach other, both projects should be selected, incase project's IRR is more than cost of capital of the project.

If projets are mutully exclusive than project which has more IRR should be selected as the project given more returns compared to other one.

In present case - b. Project B should be accepted as it has the higher IRR than Proejct A.

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