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Uptown Developers is considering two projects. Project A consists of building a wholesale book outlet on...

Uptown Developers is considering two projects. Project A consists of building a wholesale book outlet on the firm's downtown lot. Project B consists of building a sit-down restaurant on that same lot. The lot can only accommodate one of the projects. When trying to decide whether to build the book outlet or the restaurant, management should rely most heavily on the analysis results from which one of these methods?

A. Profitability index

B. Internal rate of return

C. Payback

D. Net present value

E. Accounting rate of return

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Answer #1

WHEN THE PROJECTS ARE MUTUALLY EXCLUSIVE, ONLY ONE METHOD IS CONSIDERED THE BEST IS "NET PRESENT VALUE"

IT SHOWS HOW MUCH WEALTH IS ADDED BY THE PROJECT.

NPV TAKES INTO ACCOUNT ALL YEARS CASH FLOWS, ALSO TAKE INTO ACCOUNT TIME VALUE OF MONEY, NON-TRADITIONAL CASH FLOWS DO NOT CREATE ANY PROBLEM FOR NPV. SO IT ELIMINATES ALL THE DISADVANTAGES OF OTHER METHODS, WHEN WE GO FOR MUTUALLY EXCLUSIVE PROJECTS.

SO CORRECT ANSWER : NPV (THUMBS UP PLEASE)

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