question archive Question 37 Project A has NPV of $1,200, IRR 14
Question 37 Project A has NPV of $1,200, IRR 14
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| Question 37 | |||||||||
| Project A has NPV of $1,200, IRR 14.50 and costs $200,000. Project B has NPV of $1,000, IRR of 22% and | |||||||||
| costs $100,000. Project C has NPV of $1500, IRR of 17.25% and costs of $175,000. Project D has NPV of | |||||||||
| $1000, IRR of 8.90% and costs of $200,000. If the firm has a capital budget of $375,000 which projects | |||||||||
| should it take by NPV criteria: | NPV | IRR | Costs | ||||||
| A. A and B | A | 1200 | 14.5 | 200000 | |||||
| B. A and C | B | 1000 | 22 | 100000 | |||||
| C. B and D | C | 1500 | 17.25 | 175000 | |||||
| D. C and D | D | 1000 | 8.9 | 200000 | |||||
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NPV :
NPV is the difference between Present value of Cash Inflows and Present value of cash outflows.
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.
A & B:
= NPV of Project A + NPV of Project B
= $ 1200 + $ 1000
= $ 2200
A & C:
= NPV of Project A + NPV of Project C
= $ 1200 + $ 1500
= $ 2700
B & D:
= NPV of Project B + NPV of Project D
= $ 1000 + $ 1000
= $ 2000
C & D:
= NPV of Project C + NPV of Project D
= $ 1500 + $ 1000
= $ 2500
Project A& C has higher NPV.
Hence Project A & C are selected.
Option B is correct.
