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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

Project X is very risky and has an NPV of $3 million. Project Y is very safe and has an NPV of $2.5 million. They are mutually exclusive, and project risk has been property considered in the NPV analyses. Which project should be chosen? Explain.

Summary Introduction

To explain: Whether the Project X or Project Y should be chosen under the given conditions.

Introduction:

Net Present Value (NPV):

It is a method under capital budgeting which includes the calculation of net present value of the project in which the company is investing. The calculation is done by calculating the difference between the value of cash inflow and the value of cash outflow after considering the discounted rate.

Explanation
  • Since the decision rule through NPV includes higher the NPV higher would be the profit from project in case of mutually exclusive projects and in the given scenario Project X has more NPV, it should be selected over Project Y.
  • Since the rule for mutually exclusive projects say...

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