Matt is analyzing two mutually exclusive projects of similar size. Both projects
ID: 2781539 • Letter: M
Question
Matt is analyzing two mutually exclusive projects of similar size. Both projects have 5-year lives. Project A has a NPV of $18,389, a payback period of 2.38 years, an IRR of 15.9 percent, and a cost of capital of 13.6 percent. Project B has a NPV of $19,748, a payback period of 2.69 years, an IRR of 13.4 percent, and a cost of capital of 12.8 percent. Matt can afford to fund either project, but not both. He should accept:
Project B based on its NPV.
Project A because of its shorter payback period.
Project A because it has both the higher IRR and higher cost of capital.
Project A because of its IRR.
Project A because it is better than Project B for two of the three decision criteria.
a.Project B based on its NPV.
b.Project A because of its shorter payback period.
c.Project A because it has both the higher IRR and higher cost of capital.
d.Project A because of its IRR.
e.Project A because it is better than Project B for two of the three decision criteria.
Explanation / Answer
He should choose project B based on its NPV.
Option a.
NPV is the first criteria in decision making, unless specified about any alternate method.