Table 10.3
A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows:
-The new financial analyst does not like the payback approach (Table 10.3) and determines that the firm's required rate of return is 15 percent. Based on IRR, his recommendation would be to ________.
A) accept both the projects
B) accept Project A and reject Project B
C) reject Project A and accept Project B
D) reject both the projects

Question

Table 10.3
A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows: 
-The new financial analyst does not like the payback approach (Table 10.3) and determines that the firm's required rate of return is 15 percent. Based on IRR, his recommendation would be to ________.
A) accept both the projects 
B) accept Project A and reject Project B 
C) reject Project A and accept Project B 
D) reject both the projects

Quizplus · Accepted Answer

The IRR for Project A is 12.5% and for Project B it is 17.1%. Both projects have IRR greater than the required rate of return of 15%. Therefore, both projects are acceptable based on IRR. However, as they are mutually exclusive, only one can be chosen. In this case, Project B has a higher IRR and should be accepted while Project A should be rejected.

Table 10.3 A Firm Is Evaluating Two Projects That Are Mutually Exclusive