The firm for which you work must choose between the following two mutually exclusive projects. The appropriate discount rate for the projects is 10 percent.

The firm chose to undertake A. At a luncheon for shareholders, the manager of a pension fund that owns a substantial amount of the firm’s stock asks you why the firm chose project A instead of project B when B is more profitable.
How would you justify your firm’s action? Are there any circumstances under which the pension fund manager’s argument could be correct?

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Profitability Co C C Index NPV -$1,000 $1,000 $500 1.32 $322 -500 500 400 1.57 285 AB