Google is considering an expansion of their data storage system, and the CFO and

Question

Google is considering an expansion of their data storage system, and the CFO and her financial team have estimated and calculated the NPV of the cash flows of two independent projects. One project is in Indianapolis, and has a NPV of $200,000 and an Modified IRR of 16.5%, while the second project is in San Diego has an NPV of negative $222,000 and a Modified IRR of approximately 8%. The CFO says she is comfortable that a 10% return over the life of the projects is an appropriate return for the risks undertaken. What do you recommend the CFO propose to the company's Board of Directors?

A. Don't do either project as the returns are not compelling.

B. Approve both the Indianapolis and the San Diego projects.

A. Don't do either project as the returns are not compelling.

Explanation / Answer

Answer: D. Approve only the Indianapolis project because it has the higher Modified IRR.

Explanation: Modified IRR of Project in Indianapolis is 16.5% which is more than the required return of 10% while the modified IRR of project in san diego is 8% which is lower than required return of 10%, hence only project in Indianapolis should be approved.

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