COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Which mutually exclusive project would you select, if both are priced at P 1000 and your discount rate is 15%; Project A with three annual cash flows of P 1000, or Project B, with three years of zero cash flow followed by three years of P 1, 500 annually?
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Project A
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Project B
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The IRRs are equal, hence you are indifferent
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The NPVs are equal, hence you are indifferent
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Explanation:
Detailed explanation-1: -The correct answer is Project A.
Detailed explanation-2: -The decision rule for NPV is to select a project with a positive NPV. When dealing with mutually exclusive projects, the project with the highest positive NPV is selected.
Detailed explanation-3: -2) For mutually exclusive projects, the project with the higher IRR is the correct selection.
Detailed explanation-4: -a contingent project. Two mutually exclusive projects are being considered. Neither project will be repeated again in the future after their current lives are complete.
There is 1 question to complete.