Question

Julia evaluated two independent projects using all the capital budgeting techniques mentioned in the book, and she concluded that both projects are acceptable. According to this information, which of the following statements is correct?

a. Each project has a discounted payback (DPB) that is greater than its useful life (n).

b. Both projects should be purchased.

c. Both projects have internal rates of return (IRRs) that are less than the firm's required rate of return (r).

d. One project has a positive net present value (NPV), whereas the other project has a negative NPV.

Answer 1

b. Both projects should be purchased

If projects are independent, and using all the techniques state that projects should be accepted, then both projects should be accepted. A project is accepted when IRR is greater than required rate of return. Therefore, both projects have IRR greater than required rate of return. Projects should be accepted when NPV is positive. Therefore, both projects have positive NPVs. Discounted payback will be lower than its useful life if the projects are to be accepted.