A company is evaluating two mutually exclusive projects. Project A has an NPV of $5,000 and an IRR of 15%. Project B has an NPV of $7,000 and an IRR of 12%. The company's weighted average cost of capital (WACC) is 10%. Which project should the company choose and why?

Answer options:

Project A, because it has a higher Internal Rate of Return (IRR).

Project B, because it has a lower IRR, indicating lower risk.

Project B, because it has a higher Net Present Value (NPV).

Both projects, because both IRRs exceed the WACC.

How to approach this question

For mutually exclusive projects, always prioritize NPV over IRR. NPV represents the actual dollar value added.

Full Answer

C.Project B, because it has a higher Net Present Value (NPV).✓ Correct

When choosing between mutually exclusive projects, the primary decision rule is to maximize shareholder wealth, which is measured by Net Present Value (NPV). Project B adds $7,000 of value compared to $5,000 for Project A. Although Project A has a higher IRR, it may be a smaller project or have different cash flow timing. NPV is the reliable metric here.

Common mistakes

Prioritizing IRR over NPV.

Question 11 All questions Question 13

Practice the full CPA BAR Practice Exam 4

50 questions · hints · full answers · grading

More questions from this exam

Q01Orion Corp. is analyzing its working capital efficiency. For the current year, Orion reported the...Hard Q02A company is analyzing its gross margin variance. The budgeted data for the quarter indicated sal...Medium Q03TechSolutions Inc. reports the following financial data:<br/>- Net Income: $5,000,000<br/>- Inter...Hard Q04Manufacturing Corp. uses Activity-Based Costing (ABC). The company has identified two cost pools:...Medium Q05During the current month, a company purchased 20,000 pounds of raw material for $42,000. The stan...Medium

View all 50 questions →