Consider the following projects, for a firm using a discount rate of 10%. If the
ID: 2617061 • Letter: C
Question
Consider the following projects, for a firm using a discount rate of 10%. If the projects are mutually exclusive, which, if any, project(s) should the firm accept?
Project NPV IRR PI
E $200,000 10.2% 1.04
F $(200,001) 11% .81
G $1 10% 1.01
H $(235,000) 9% .95
PLease explain step by step how you came to your answer.
Explanation / Answer
If the discount rate is 10 %, all projects with IRRs lesser than the discount rate should be rejected as IRR<Discount Rate leads to negative NPV. If IRR = Discount Rate then NPV is zero. Hence, such projects should also be rejected.
Therefore, Project G and H are rejected. Of the remaining Projects of E and F, the latter has negative NPV and former has a positive NPV. This would mean that the firm should accept Project E.