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. His recommendation would be to
A) accept projects A and B.
B) accept project A and reject B.
C) reject project A and accept B.
D) reject both.

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. His recommendation would be to
A) accept projects A and B. 
B) accept project A and reject B. 
C) reject project A and accept B. 
D) reject both.

Quizplus · Accepted Answer

The new financial analyst determines the required rate of return to be 15%, therefore, the firm should use the net present value (NPV) method to evaluate the projects. The NPV of Project A is $1,227, while the NPV of Project B is $2,007. Since Project B has a higher NPV, it should be accepted over Project A. Therefore, the firm should reject Project A and accept Project B.

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