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Question
Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics:
Cash Flows
Year Project Q Project R
0 $(4,000) $(4,000)
1 0 3,500
2 5,000 1,100
IRR 11.8% 12.0%
If the firm's required rate of return (r) is 10 percent, which project should be purchased?
a. Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return.
b. Neither project should be accepted, because the IRRs for both projects exceed the firm's required rate of return.
c. Project Q should be accepted, because its net present value (NPV) is higher than Project R's NPV.
d. Project R should be accepted, because its net present value (NPV) is higher than Project Q's NPV.
e. None of the above is a correct answer.
Answer
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