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Consider the capital budgeting decision to be made with the following data about 2 competing projects....

Consider the capital budgeting decision to be made with the following data about 2 competing projects. Project A has an NPV of $12 500, and IRR of 10% and a payback period of 3 years. Project B has an NPV of $12 000, but an IRR of 13% and a payback period of 2 years 10 months. Which project(s) would be chosen on an independent basis?

Select one:

a. Project B

b. Neither Project A nor Project B

c. Project A and Project B

d. Project A

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Answer #1

The answer will be “c” – Project A and Project B

Explanation: Here the projects are independent and not mutually exclusive. Hence both the projects can be selected if they meet the capital budgeting criteria.

NPV of both projects are positive and hence both projects can be selected. IRR of both projects are in double digits and since the hurdle rate is not provided we can assume that both the projects have IRR which is greater than hurdle rate. Also the desired payback is not given and hence we can assume that payback of both projects are less than the desired payback period.

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