Project a Has a Net Present Value of $1,500, a Payback

question 5

Multiple Choice

Project A has a net present value of $1,500, a payback period of 2 years, and an internal rate of return of 12%. Project B has a net present value of $1,800, a payback period of 4 years, and an
Internal rate of return of 10%. Project C has a net present value of $1,750, a payback period of 3
Years, and an internal rate of return of 11%. If the projects are mutually exclusive, which
Project should be undertaken?

• A)Project B and Project C are equally acceptable since each would increase firm value by the same amount.
• B)Project C because it has an NPV that is only slightly less than that of Project B and offers a higher IRR and a shorter payback period than Project B.
• C)Project A because it has a higher IRR than the other two projects and pays back in the shortest period of time.
• D)Project B because it has the highest NPV of the three projects.

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Definitions:

Gross Investment

The total amount spent on new capital assets, before accounting for depreciation, indicating the level of investment in an economy's productive capacity.

Net Investment

The total a company invests in new capital assets, minus the cost of depreciation.

Bondholders

Individuals or institutions that hold the debt securities issued by governments or corporations, entitled to receive interest payments and the principal on maturity.

Common Stockholders

Individuals or entities that own shares of common stock in a company, granting them certain rights like voting on corporate matters.