Consider the following two mutually exclusive projects: : The required return is
ID: 2625431 • Letter: C
Question
Consider the following two mutually exclusive projects::
The required return is 15 percent for both projects. Which one of the following statements related to these projects is correct?
A. Because both the IRR and the PI imply accepting Project B, that project should be accepted.
B. The profitability rule implies accepting Project A.
C. The IRR decision rule should be used as the basis for selecting the project in this situation.
D. Only NPV implies accepting Project A. E. NPV, IRR, and PI all imply accepting Project A.
Explanation / Answer
Rate of return 11.50% Case -> A B Choice by this method Formula Year Cash flow PV of cash flow Cash flow PV of cash flow Cash flow PV of Cash flow 0 $(317,000.00) $(317,000.00) $(26,500.00) $(26,500.00) A A/(1+r)^0 1 $ 27,700.00 $ 24,843.05 $ 9,057.00 $ 8,122.87 B B/(1+r)^1 2 $ 56,000.00 $ 45,044.14 $ 10,536.00 $ 8,474.73 C C/(1+r)^2 3 $ 55,000.00 $ 39,676.93 $ 11,849.00 $ 8,547.85 D D/(1+r)^3 4 $ 399,000.00 $ 258,150.77 $ 13,814.00 $ 8,937.58 E E/(1+r)^4 NPV $50,714.89 $7,583.04 A Sum of above PVs of cash flow IRR 16.44% 23.44% B r if npv = 0 PI 1.159984 1.286152 B Hebce