Problem:
Two projects being considered are mutually exclusive and have the following projected cash flows:.
Year Project A Cash Flow Project B Cash Flow
0 -$50,000 -$50,000
1 15,625 0
2 15,625 0
3 15,625 0
4 15,625 0
5 15,625 99,500
If the required rate of return on these projects is 10 percent, which would be chosen and why?
Choices for answers:
Project B because it has the higher NPV.
Project B because it has the higher IRR.
Project A because it has the higher NPV.
Project A because it has the higher IRR.
Neither, because both have IRRs less than the cost of capital.