Isaac Has Analyzed Two Mutually Exclusive Projects That Have 3-Year

question 20

Multiple Choice

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be? 

• A) Accept both projects because both NPVs are positive 
• B) Accept Project A because it has the shortest payback period 
• C) Accept Project B and reject Project A based on the NPVs 
• D) Accept Project A and reject Project B based on their AARs 
• E) Accept Project A because it has the lower required return 

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Definitions:

Current Assets

Short-term assets that are expected to be converted into cash, sold, or consumed within a year or within the normal operating cycle of a business.

Land and Building

Real estate assets including both the physical ground (land) and any structures (buildings) that are permanently attached to it.

Sales

The activities involved in selling goods or services in return for money or other compensation.

Net Income

The amount of money that remains after all operating expenses, taxes, and interest have been deducted from total revenue.