Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis. Both projects have 3- year lives. Isaac has been asked for his best recommendation given this information. His recommendation should be to accept:
A)both projects.
B)project B because it has the shortest payback period.
C)project B and reject project A based on their net present values.
D)project A and reject project B based on their average accounting returns.
E)neither project.

Question

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis. Both projects have 3- year lives.  Isaac has been asked for his best recommendation given this information. His recommendation should be to accept:
A)both projects. 
B)project B because it has the shortest payback period. 
C)project B and reject project A based on their net present values. 
D)project A and reject project B based on their average accounting returns. 
E)neither project.

Quizplus · Accepted Answer

The best recommendation would be to accept project B and reject project A based on their net present values. Project B has a higher NPV ($7,125) than project A ($6,000). The payback period should not be the only criterion for decision-making, and average accounting returns are not a reliable measure of profitability. Since the projects are mutually exclusive, it's not possible to accept both. Therefore, the best choice is to accept the project with the highest NPV, which is B, and reject A.

Isaac Has Analyzed Two Mutually Exclusive Projects of Similar Size