Tara Is Evaluating Two Mutually Exclusive Capital Budgeting Projects That

question 86

Multiple Choice

Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics: Cash Flows
$\begin{array}{ccc}\underline{\text { Year} }&\underline{\text { Project Q}} &\underline{ \text { Project R}}\\ 0 & \$(4,000) & \$(4,000) \\1 & 0 & 3,500 \\2 & 5,000 & 1,100\\\\\text {IRR}&11.8\%&12.0\%\end{array}$ If the firm's required rate of return (r) is 10 percent, which project should be purchased?

• A)Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return.
• B)Neither project should be accepted, because the IRRs for both projects exceed the firm's required rate of return.
• C)Project Q should be accepted, because its net present value (NPV) is higher than Project R's NPV.
• D)Project R should be accepted, because its net present value (NPV) is higher than Project Q's NPV.
• E)None of the above is a correct answer.

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