Question

Randy's Manufacturing is considering two mutually exclusive projects. The company has a required rate of return of 13.5% on projects of this nature. Project A costs $100,000 and has an IRR of 14.5%. Project B costs $150,000 and has an IRR of 14%. Which project should be accepted and why?

A) Project A because it costs less and has a higher IRR than Project B
B) Project A because it has the highest IRR of the two projects and exceeds the required return
C) Project B because it has the largest net present value
D) Project B because it has the lower IRR of the two projects
E) Both projects because both project IRRs are greater than the required return

Answer 1

Project A should be accepted as it has a higher IRR of 14.5%, exceeds the required rate of return of 13.5%, and costs less than Project B.

Step-by-step explanation:

Randy's Manufacturing is considering two mutually exclusive projects with a required rate of return of 13.5%. Understanding which project to accept involves looking at the Internal Rate of Return (IRR) and the cost of the projects in comparison to the company's required rate of return. Project A has a cost of $100,000 with an IRR of 14.5%, while Project B costs $150,000 and has an IRR of 14%. Project A not only surpasses the company's required rate of return, it also yields a higher IRR than Project B and costs less. Thus, the correct choice is Project A because it has the highest IRR of the two projects and exceeds the required return.