CFA® Level 1: Project Selection at a 10% Required Rate of Return

Project Selection at 10% Required Rate of Return

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If the required rate of return on these projects is 10 percent, which would be chosen and why?

A. Project B because it has the higher IRR.

B. Neither, because both have IRRs less than the cost of capital.

C. Project B because it has the higher NPV.

D. Project A because it has the higher IRR.

E. Project A because it has the higher NPV.

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A. B. C. D. E.

NPV(A) = $15,625(PVIFA(10%,5)) - $50,000 = $15,625(3.7908) - $50,000 = $59,231.25 - $50,000 = $9,231.25.

NPVB = $99,500(PVIF(10%,5)) - $50,000 = $99,500(0.6209) - $50,000 = $61,779.55 - $50,000 = $11,779.55.

NPV(B) > NPV(A); $11,779.55 > $9,231.25; Choose Project B.

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