Consider the following two mutually exclusive projects:
The required return is 15 percent for both projects. Which one
of the following statements related to these projects is correct?
Answer
a.
Because both the IRR and the PI imply
accepting Project B, that project should be accepted.
b.
The profitability rule implies accepting
Project A.
c.
The IRR decision rule should be used as the
basis for selecting the project in this situation.
d.
Only NPV implies accepting Project
A.
e.
NPV, IRR, and PI all imply accepting Project
A.
Year 0 1 2 3 4
Cash Flow (A) -$318,844 27,700 56,000 55,000 399,000
Cash Flow (B) -$27,476 9,057 10,536 11,849 13,814