CFA Practice Question

There are 233 practice questions for this study session.

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
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