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Aesop has to choose between two mutually exclusive projects that have 5-year lives and conventional cash...

Aesop has to choose between two mutually exclusive projects that have 5-year lives and conventional cash flows. Project Lion has an NPV of $73,406 and a payback period of 3.48 years. Project Lamb has a payback period of only 2.22 years and an IRR of 13.22 percent. The required return for Project Lion is 16 percent while it is 14 percent for Project Lamb. Which project should Aesop recommend?

a. Accept Project Lamb because it has the lower required return and must be the safer investment

b. Accept Project Lion since it has a higher NPV.

c. Accept both projects because both NPVs are positive.

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Answer #1

Answer: Option b is correct.
Explanation:
Mutually exclusive projects refers to a set of projects out of which we can select only one project for investment. We cannot accept both the projects. We should choose the project with higher NPV because it increases the wealth of shareholders.

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