Consider the following three mutually exclusive projects: If the appropriate cost of capital is 10% for all three projects, which project should be undertaken?
A)Project C since it has the highest IRR
B)Project B since it has the higher payback period
C)Project A since it has the highest NPV
D)A correct decision cannot be made unless the actual cash flows from each project are known.

Question

Consider the following three mutually exclusive projects:  If the appropriate cost of capital is 10% for all three projects, which project should be undertaken?
A)Project C since it has the highest IRR 
B)Project B since it has the higher payback period 
C)Project A since it has the highest NPV 
D)A correct decision cannot be made unless the actual cash flows from each project are known.

Quizplus · Accepted Answer

The appropriate cost of capital for all three projects is 10%, which makes the comparison of the three projects easier. Project A has the highest NPV, indicating that it will contribute the most value to the company. Therefore, Project A should be undertaken. The IRR and payback period are important factors to consider, but NPV is the most comprehensive measure of a project's value. Since all three projects have the same cost of capital, the best project to undertake is the one with the highest net present value (NPV). Project A has the highest NPV, making it the best choice. The internal rate of return (IRR) and payback period are also important considerations, but they are not as reliable as NPV in determining the relative value of each project. Without knowing the actual cash flows from each project, we cannot make a definitive decision based on IRR or payback period alone.

Consider the Following Three Mutually Exclusive Projects: If the Appropriate