You are going to choose between two investments. Both cost $80,000, but investment A pays $35,000 a year for four years while investment B pays $30,000 a year for five years. If your required return is 13%, which should you choose?
A) A, because the pays back sooner.
B) A, because the IRR exceeds 13%.
C) A, because the project has a higher IRR.
D) B, because the IRR exceeds 13%.
E) B, because it has a higher NPV.

Question

Quizplus · Accepted Answer

Investment B has a higher NPV when discounted at the required return of 13%. This is because even though it pays less per year, it extends for an additional year, providing more overall cash flow when considering the time value of money.

You Are Going to Choose Between Two Investments