Question

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.

Answer 1