Two Projects Being Considered by a Firm Are Mutually Exclusive

question 54

Multiple Choice

Two projects being considered by a firm are mutually exclusive and have the following projected cash flows: $\begin{array}{lll}\underline{\text { Year }} &\underline{ \text { Project A }}&\underline{ \text { Project B }}\\0 & (\$ 100,00) & (\$ 100,000 \\1 & 39,500 & 0 \\2 & 39,500 & 0 \\3 & 39,500 & 133,000\end{array}$ Based only on the information given, which of the two projects would be preferred, and why?

• A)Project A, because it has a shorter payback period.
• B)Project B, because it has a higher IRR.
• C)Indifferent, because the projects have equal IRRs.
• D)Include both in the capital budget, since the sum of the cash inflows exceeds the initial investment in both cases.
• E)Choose neither, since their NPVs are negative.

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