Question

A division manager is choosing between two mutually exclusive projects. Project A Project B Net present value $235,000 $210,000 Internal rate of return 13% 15% The company requires any project to earn at least 12%. The manager believes that cash inflows from the project can be reinvested at the rate of 12%. Which project will the manager likely choose?

Answer 1

Project A

Step-by-step explanation:

There are two things to consider here when deciding on the project selection. First, the manager requirement to select the project which at least earns 12%.

Second, maximum return that could be generated from the project. This could be confirmed when determining which project has the highest Net present value (NPV). As NPV, is the difference between the present value of cash outflow (investment) and present value of cash inflow (returns) which is discounted at present time. If positive NPV is calculated then this means project is worthwhile.

Assessing the information given in the question, both projects earn at least 12%, therefore they both meet manager's requirements. While in case of Net present value Project A has the highest NPV and therefore suggest a better return on the project's investment in comparison to project B.

Hence, manager will likely choose Project A.