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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. 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
Expert Solution
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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