Question

13. Narion, Inc. has a 20% required rate of return. Three managers have presented three potential projects to increase income over the next ten years, each with their preferred measure. Project A was reported to have an NPV of $(2,460). Project B was reported with an IRR of 28%. Project C was reported to have a payback period of 23 years. With which of these projects should Narion move forward?

		Project A
		All three sound great!
		Project C
		Project B

Answer 1

The Correct answer choice is “PROJECT B”, Narion move forward with the “PROJECT B”

-As per Net Present Value (NPV) analysis, the Project should be accepted only if the Net Present Value (NPV) of the Project is positive (Greater than $0), else it is rejected. Here, the Net Present Value (NPV) of the Project A is Negative $2,460, and therefore, the Narion should reject the Project.

-The Internal Rate of Return (IRR) is the rate which the present value of the annual cash flows is equals to the initial investment of the project. As per Internal Rate of Return (IRR) analysis, the Project should be accepted only if the IRR of the Project is greater than the required rate of return of the Project. Here, the IRR of the PROJECT B (28%) is greater than the Required Rate of Return (20%) of the project and therefore, the Narion should accept the PROJECT B.

-The Payback period is the number of years taken to recover the total amount of money invested in the project. If the payback period is less than the enterprises required number of years, then the project should be accepted, Else it is rejected. Here, the Payback period of the Project C is 23 Years which is greater than the required number of years of 20 years and therefore, the Narion should reject the Project C.