Tara is evaluating two mutually exclusive capital
budgeting projects that have the following characteristics:
Cash Flows |
||
Year |
Project Q |
Project R |
0 |
$(4,000) |
$(4,000) |
1 |
0 |
3,500 |
2 |
5,000 |
2,100 |
IRR |
11.8% |
28.40% |
If the firm's required rate of return (r) is 10 percent, which project should be purchased?
a. |
Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return. |
|
b. |
Neither project should be accepted, because their NPVs are too small |
|
c. |
Project Q should be accepted, because its IRR is higher than that of Project R. |
|
d. |
Project R should be accepted, based on the net present value ranking criterion. |
|
e. |
None of the above is a correct answer. |
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