- CFA Exams
- CFA Level I Exam
- Study Session 10. Corporate Finance (1)
- Reading 32. Capital Budgeting
- Subject 5. Comparison of the NPV and IRR Methods

###
**CFA Practice Question**

ABC Corp. is considering the following mutually exclusive projects:

Which of the following would represent the most optimal choice?

A. Since Project A has an NPV of $23,997 and Project B has an NPV of $2,999, only Project A should be chosen.

B. Since Project A has an NPV of $23,997 and Project B has an NPV of $2,999, both should be chosen.

C. Since Project A has an NPV of $23,997 and Project B has an NPV of $47,565, only Project B should be chosen.

**Explanation:**Find the NPV of each project. Note: NPV= (PV of CF) - (Cost)

Project A: Given: PMT = 45,900; N = 5; I = 10% -> Find: PV = 173,997 -> NPV = 173,997-150,000 = 23,997

Project B: Given: PMT = 162,912; N = 5; I = 13% -> Find: PV = 572,999 -> NPV = 572,999-570,000 = 2,999

Since the projects are mutually exclusive, the optimal choice would be the project with the higher NPV, Project A.

###
**User Contributed Comments**
8

User |
Comment |
---|---|

ramdabom |
Why not choose both? They both add value as they pass the NPV criterion |

CoffeeGirl |
mutually exclusive. |

fearon |
mutually exclusive projects compete for same resources therefore only one can be chosen |

Jono |
most OPTIMAL choice so it is one or the other |

Laurier |
Wow - I'd do a lot better at answering if I actually read the questions... |

kellyyang |
mutually exclusive project, you only have a choice to select the Higher NPV. But if project is independent, you can take both NPV. ( but both need to positive NPV) Hope this helps! |

Shcote |
Sorry Jono but the most optimal choice would be both if it wasn't mutually exclusive. The two projects have a positive value. |

leon121 |
Mutually exclusive = you can only take one project. Independent = you can take both...i.e., in the event that both have positive NPVs |