Two Mutually Exclusive Projects Have the Following NPVs and Project

question 3

Multiple Choice

Two mutually exclusive projects have the following NPVs and project lives.
$$\begin{array} { r r c } \text { Project } & \text { NPV } & \text { Life } \\\text { Project A } & \$ 5,000 & \text { 3 years } \\\text { Project B } & \$ 6,500 & 5 \text { years }\end{array}$$
If the cost of capital is 15%, which project would you accept?

• A) A
• B) B
• C) Both A and B
• D) Reject both A and B

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Definitions:

Present Value Payback Period

A capital budgeting technique that calculates the period of time required for the present value of future cash flows to cover the initial investment cost.

NPV

Net Present Value, a calculation used to determine the current value of a series of future cash flows.

PI

The profitability index (PI), in financial management, is a method used to evaluate the desirability of an investment or project, calculating the ratio of the present value of future cash flows to the initial investment.

Cost of Capital

A financial metric representing the minimum return that a company must earn on its existing asset base to satisfy its creditors, owners, and other providers of capital.