Question

Project A has a net present value of $1,500, a payback period of 2 years, and...

Project A has a net present value of $1,500, a payback period of 2 years, and an internal rate of return of 12%.  Project B has a net present value of $1,800, a payback period of 4 years, and an internal rate of return of 10%.  Project C has a netpresent value of $1,750, a payback period of 3 years, and an internal rate of return of 11%.  If the projects are mutually exclusive, which project should be undertaken?

A.

Project A because it has a higher IRR than the other two projects and pays back in the shortest period of time.
B.

Project C because it has an NPV that is only slightly less than that of Project B and offers a higher IRR and a shorter payback period than Project B.
C.

Project B and Project C are equally acceptable since each would increase firm value by the same amount.
D.

Project B because it has the highest NPV of the three projects.
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Answer #1

Answer: -

Project with Lowest PAYBACK PERIOD and Highest IRR should be always a choice of an investor.

Project-A: NPV: $1500, Payback: 2 years, IRR: 12%

Project-B: NPV $1800, Payback: 4 years, IRR: 10%

Project-C: NPV-$1750, Payback: 3 years, IRR: 11%

All Projects are Mutually Exclusive.

Option-B, Option-C and Option-D are not correct as they are comparing Project B and Project C and nothing about Project-A which is an eligible project among three.

Hence, from given option Option-A is correct as it has highest IRR and other 2 projects and payback in shortest period of time.

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