Question
You are a financial analyst for Dalton Financial Inc. You are evaluation two different capital budgeting proposals. However, because the proposals are mutually exclusive, Gist
You are a financial analyst for Dalton Financial Inc. You are evaluation two different capital budgeting proposals. However, because the proposals are mutually exclusive, Gist can only accept one of them. You must determine which of the proposals is better and should be adopted. The following table provides Gist's cost of capital (i.e., discount rate), net present value (NPV), and internal rate of return (IRR) for the two proposals. Which proposal should be selected? Project A Project B
NPV 1.85 million 2.25 million
IRR 18% 16.50%
Disc. rate 14% 14%
Question 2 options:
Choose Project A because it has the greater IRR
Choose Project B because it has the greater NPV
Either would be acceptable since IRR favors Project A and NPV favors Project B
Calculate the profitability index (PI) and choose the project that is favored by two of the decision criteria (i.e., best two out of three)
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