Question

Two alternative $15,000 investments are being considered. A 10% discount rate is used because the company never invests at a lower rate than this. The NPV of Alternative A show a total present value of $12,400 and Alternative B a total present value of $12,800. Given this information one should select:

a. neither, until one has used the ARR method to obtain the true rate of return

b. because it has a higher total present value

c. neither, until the investment has been discussed with the employees involved

d. neither, NPV is negative in both cases

Answer 1

• The correct answer is Option ‘D’ Neither of the alternative should be opted because the Net Present Value in both cases are NEGATIVE.

	Alternative A	Alternative B
Total Present value	$                12,400	$                12,800
Less: Investment	$                15,000	$                15,000
Net present value	$                (2,600)	$                (2,200)