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Homework answers / question archive / An auto manufacturing company is preparing a capital budget and considering four long-term investments

An auto manufacturing company is preparing a capital budget and considering four long-term investments

Finance

An auto manufacturing company is preparing a capital budget and considering four long-term investments. The net present value of each project is as follows:

  • Project A: 0.25
  • Project B: 0
  • Project C: -0.5
  • Project D: 1.5

In theory, which two projects should the company pursue?

  • Projects A and B
  • Projects B and D
  • Projects A and D
  • Projects B and C

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As we know that 

Net Present Value = Present Value of Cash Inflows - Present Value of Cash Outflows

A project is recommended to pursue when the NPV is positive and a project should be rejected when the NPV is negative. In the above projects, Project A, B and D should be selected as NPV is positive while Project C should be rejected as it has negative NPV. As said that only two projects are accepted. So, Project A and D should be selected as they have higher NPV while Project B has lower NPV.

So, The correct option is 3rd "Projects A and D".

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