You are considering two independent projects with the following cash flows. The required return for both...

You are considering two independent projects with the following cash flows. The required return for both projects is 10%. Given this information, which one of the following is correct?

Year Project A Project B

0 -$950,000 -$125,000

1 $330,000 $ 55,000

2 $400,000 $ 50,000

3 $450,000 $ 50,000

A. You should accept project B since it has the higher IRR and reject project A because you cannot accept both projects.

B. You should accept project A because it has the lower NPV and reject project B

C. You should accept project A because it has the higher NPV and you cannot accept both projects

D. You should accept project B because it has the higher IRR and reject project A.

E. You should accept both projects if the funds are available to do so since both NPV’s are >0.

Expert Solution

rate	10.0000%		10%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(950,000.00)	0	(950,000.00)	(950,000.00)
330,000.000	1	300,000.00	(650,000.00)
400,000.000	2	330,578.51	(319,421.49)
450,000.000	3	338,091.66	18,670.17

NPV of A = 18,670

rate	10.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(125,000.00)	0	(125,000.00)	(125,000.00)
55,000.000	1	50,000.00	(75,000.00)
50,000.000	2	41,322.31	(33,677.69)
50,000.000	3	37,565.74	3,888.05

NPV of B = 3,888

E. You should accept both projects if the funds are available to do so since both NPV’s are >0.

jeff jeffy answered 2 years ago

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