When ranking two mutually exclusive investments with different initial amounts but approximately the same useful life, and assuming no capital rationing, management should give priority to the project:
A) That generates cash flows for the longer period of time.
B) Whose net after-tax cash flows equal the initial investment outlay.
C) That has the greater accounting rate of return (ARR).
D) Whose cash flows vary the least.
E) That has the higher net present value (NPV).

Question

Quizplus · Accepted Answer

The best choice would be the project with the higher net present value (NPV). NPV takes into account the time value of money and provides a more accurate analysis of the profitability of the investment. Projects with positive NPV will increase the value of the firm. Thus, E is the best answer.

When Ranking Two Mutually Exclusive Investments with Different Initial Amounts