Question
The company's problems can be solved through one of two mutually exclusive alternatives. The company's discount rate is 12%. You have also been told that
The company's problems can be solved through one of two mutually exclusive alternatives. The company's discount rate is 12%. You have also been told that alternative 1 has an internal interest rate of 22% and that alternative 2 has an internal interest rate of 28%. You have also been told that option 1 and option 2 have the same net present value at the interest rate of 16%. Assess the following statements from the company's situation: 1. Since alternative 2 has the highest internal rate of return, the internal rate of return rule states that alternative 2 must be chosen. Both options must be implemented because the IRR is greater than the discount rate in both cases. Since the discount rate is lower than the interest rate that gives the same net present value for the two projects, alternative 1 must be chosen. Which of the following answer alternatives is correct, from the perspective of the current decision situation? Choose an alternative:
Only statement 3 is correct.
Both statements 1 and 3 may be correct, but more information is needed for the right decision to be made.
Only statement 1 is correct.
Only statement 2 is correct.
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