Question

Consider the following three-year projects A and B each with the same initial investment of $1000. You are presented with the following measures for the projects:

Project A: NPV $400; Payback 24 months
Project B: NPV $545; Payback 26 months
Which project would you choose and why?

a) Project A
b) Project B
c) Either project, as they have the same initial investment
d) Need more information to decide

Answer 1

To choose between Project A and Project B, we need to consider the NPV and payback period. Project B has a higher NPV, indicating higher profitability, but Project A has a shorter payback period, meaning a quicker return on investment.

Step-by-step explanation:

To determine which project to choose, we need to consider the NPV (Net Present Value) and payback period for each project. Project A has an NPV of $400 and a payback period of 24 months, while Project B has an NPV of $545 and a payback period of 26 months.

Based on the NPV, Project B has a higher value, indicating a higher return on investment. However, Project A has a shorter payback period, meaning the initial investment will be recovered sooner.

Ultimately, the decision will depend on the investor's priorities. If they prioritize maximizing long-term profitability, they may choose Project B. If they prioritize recovering the investment quickly, they may choose Project A.