Question

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 A and Project B

b. Neither Project A nor Project B

c. Project A

d. Project B

Answer 1

	Project A	Project B
NPV	$12,500	$12,000
IRR	10%	13%
Payback Period	3 Years	2 Years 10 months

On an independent basis both the projects can be chosen because they both have a positive NPV.

NPV rule is superior to IRR and Payback period rules

Option a is correct: Project A and Project B

Option b is incorrect because there is no reason to not choose either of the projects because NPV of both the projects is positive

Options c and d are incorrect because on an independent basis both the projects can be chosen