Suppose a Firm Uses Both the Net Present Value (NPV)

question 69

Multiple Choice

Suppose a firm uses both the net present value (NPV) technique and the internal rate of return (IRR) technique to evaluate two mutually exclusive capital budgeting projects. If a ranking conflict exists between NPV and IRR, which of the following criteria should be used to make the final investment decision?

• A)The project with the higher IRR should be purchased.
• B)The project with an internal rate of return (IRR) equal to the firm's expected rate of return should be purchased.
• C)The project with the higher net present value (NPV) should be purchased.
• D)The project with the payback period equal to the expected years required to recover the original investment should be purchased.
• E)The project with the discounted payback period that is greater than its traditional payback period should be purchased.

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Definitions:

Compounded Annually

Interest calculation method where interest is added to the principal at the end of each year, and future interest calculations include this additional amount.

Interest

The cost of borrowing money or the return on investment for lenders, typically expressed as a percentage.

Rate of Return

The gain or loss on an investment over a specific period, expressed as a percentage of the investment's initial cost.

Interest Rate

The fee, shown as a percentage of the principal, that a lender requires from a borrower for the utilization of assets.