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Homework answers / question archive / Suppose you are a financial manager and you have the following information on two projects: Project Alpha Project Beta NPV $34,670 $1,500 IRR (required rate of return is 10%) 12
Suppose you are a financial manager and you have the following information on two projects:
Project Alpha Project Beta
NPV $34,670 $1,500
IRR (required rate of return is 10%) 12.4% 10.6%
Payback Period 6 years 2 years
If the projects are mutually exclusive, is there a clear best option to which project should be undertaken? Why or why not?
Yes, the clear best option is Project Alpha because Alpha has a higher NPV as well as a higher IRR. A higher NPV means that the project creates more value. A higher IRR means that the project has a higher rate of return on its investment.
Which option is the financial manager likely to choose? Why?
Financial Manager should choose Alpha Project although payback period for Alpha is higher but the other two measure of NPV and IRR are better for Alpha. Hence Alpha should be undertaken.
Under what circumstances would the other project be undertaken?
The only circumstance in which Project Beta would be undertaken is if payback period is the most important criterion for the project's investors.
