Question

Consider the following two projects:

Project	Year 0 Cash Flow	Year 1 Cash Flow	Year 2 Cash Flow	Year 3 Cash Flow	Year 4 Cash Flow	Discount Rate
A	-100	40	50	60	N/A	.15
B	-73	30	30	30	30	.15

Assume that projects A and B are mutually exclusive. The correct investment decision and the best rational for that decision is to:

Group of answer choices

a.invest in project A since NPVB < NPVA.

b.invest in project B since IRRB > IRRA.

c.invest in project B since NPVB > NPVA.

d. invest in project A since NPVA > 0

Answer 1

Answer c.Invest in project B since NPV B>NPV A

The NPV of the projects can be computed using excel and so can the IRR too.

The discount rate is given as 15% or .15

For Project A the NPV can be computed using the formula =NPV(15%,B3:B6)+B2 we get NPV as $12.04

For Project B the NPV can be computed using the formula =NPV(15%,C3:C6)+C2 we get NPV as $12.65

The IRR of Project A cann be computed using the formula=IRR(B2:B6) we get IRR as 21.65%

The IRR of Project B can be computed using the formula =IRR(C2:C6) we get IRR as 23.34%

When it comes to mutually exclusive projects , the project with the higher NPV is preferred.Here the NPV of B is greater than NPV of so the firm should invest in Project B.