Question

Consider the following cash flows for two mutually exclusive capital investment projects. The required rate of return is 16%. Use this information for the next 3 questions. Year Project A Cash Flow Project B Cash Flow 0 ($50,000) ($20,000) 1 15,000 6,000 2 15,000 6,000 3 15,000 6,000 4 13,500 5,400 5 13,500 5,400 6 6,750 5,400

Which of the following statements is true concerning projects A and B?

a) Due to time disparity, IRR indicates that project A should be accepted and NPV indicates that project B should be accepted.

b) Both NPV and IRR lead to the same investment decision.

c) Due to size disparity, IRR indicates that project B should be accepted and NPV indicates that project A should be accepted.

d) Due to size disparity, IRR indicates that project A should be accepted and NPV indicates that project B should be accepted.

e) Due to time disparity, IRR indicates that project B should be accepted and NPV indicates that project A should be accepted.

Answer 1