2D2G STENNET COMPANY IS CONSIDERING TWO MUTUALLY EXCLUSIVE PROJECTS....
327.
CSO: 2D2a
LOS: 2D2g
Stennet Company is considering two mutually exclusive projects. The company’s cost of
capital is 10%. The net present value (NPV) profiles of the two projects are as follows.
Discount Rate
Net Present Value $(000)
(percent)
Project A
Project B
0
$2,220
$1,240
10
681
507
12
495
411
14
335
327
16
197
252
18
77
186
20
(26)
128
22
(115)
76
24
(193)
30
26
(260)
(11)
28
(318)
(47)
The company president is of the view that Project B should be accepted because it has the
higher internal rate of return (IRR). The president requested John Mack, the CFO, to
make a recommendation. Which one of the following options should Mack recommend
to the president?
a.
Agree with the president.
b.
Accept Project A because it has an IRR higher than that of Project B.
c.
Accept both Projects A and B as the IRR for each project is greater than cost of
capital.
d.
Accept Project A because at a 10% discount rate it has an NPV that is greater than
that of Project B.