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.