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

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**CFA Practice Question**

ABC Corp. is considering the following independent projects:

Which of the following would represent the 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, both should be chosen.

**Explanation:**Step 1. Find 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 independent and they both have positive NPVs, the optimal choice would be to choose both.

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**User Contributed Comments**
6

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

DonCap |
key word is independent |

boddunah |
yup |

dipu617 |
Ah yeah.."Independent"... I don't know why I thought they are mutually exclusive projects!!! |

Sp1993 |
Ahh, to do all the hard work then ignore the word "independent", pretty annoying. Good Q though :) |

Maxevda |
Stupid question. Look at the payoff for investing $570,000 in project B. |

markbucfa |
I was thinking, why not just do 3 Project As. Lol |