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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Assume that there are two competing projects, A and B. Project A has an NPV of $1,000 and an IRR of 15%. Project B has an NPV of $800 and an IRR of 20%. Which of the following is true?

  1. a. Project A should be chosen because it has a higher NPV.
  2. b. Project B should be chosen because it has a higher IRR.
  3. c. It is not possible to use NPV or IRR to choose between the two projects.
  4. d. Neither project should be chosen.
  5. e. None of these.

To determine

Identify the project to be chosen on the basis of NPV.

Explanation

Net present value:

The remaining balance of the present value of a project’s inflows and outflows is known as net present value (NPV). It is a discounting model of capital investment decision. A project with a positive NPV increases the wealth of a firm whereas a project with a negative NPV decreases the wealth of a firm.

a.

Project A is more profitable than Project B because it has a higher NPV. Therefore, option a is the correct answer.

b.

NPV is preferred over IRR because NPV is calculated with the help of IRR...

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