- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 5. Capital Investments and Capital Allocation
- Subject 2. Capital Allocation
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 |