Question

1. Consider the following information for projects K and W to answer the following 2 (A & B) questions:

Project K: NPV = $1,500. IRR = 20%

Project W: NPV = $2,500. IRR = 15%

A) Assume Project K and Project W are independent projects with a WACC = 10%. Which of the following is true?

a. Both Projects K and W should be enacted since both have a positive NPV.

b. Neither Project K or W should be enacted since both have a positive NPV.

c. Only Project W should be enacted since it has the highest NPV.

d. Only Project K should be enacted since it has the highest IRR.

B. Assume Project K and Project W are mutually exclusive projects with a WACC = 10%. Which of the following is true?

a. Only Project W should be enacted since it has the highest NPV.

b. Neither Project K or W should be enacted since both have a positive NPV.

c. Both Projects K and W should be enacted since both have a positive NPV.

d. Only Project K should be enacted since it has the highest IRR.  

Answer 1

Part A: Option a is correct. Both Projects should be enacted.
In case of independent projects, the cash flows of one project is not affected whether we accept or reject the other project. So, when NPV>0 and the projects are independent, we can accept both the projects.

Part B:Option a is correct.
Only Project W should be enacted as it has highest NPV.
In case of mutually exclusive projects only one project should be accepted. Between the two projects, we should accept the project with highest NPV because it increases the value of a business.