Corporate Finance Q44
| Cash Flows | ||||||||
| Year | 0 | 1 | 2 | 3 | 4 | NPV | IRR (%) | |
| Project A | -100 | 0 | 0 | 0 | 200 | 24.20 | 18.92 | |
| Project B | -100 | 40 | 40 | 40 | 40 | 19.19 | 21.86 | |
The appropriate investment decision in this case is to:
- Option : B
- Explanation : When valuing mutually exclusive projects, the decision should be made with the NPV method because this method uses the most realistic discount rate, namely the opportunity cost of funds. In the example, the reinvestment rate for the NPV project (here 12 percent) is more realistic than the reinvestment rate for the IRR method (here 18.92 percent or 21.86 percent).
