4.

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?

Multiple Choice

• Accept both projects because both NPVs are positive

• Accept Project A because it has the shortest payback period

• Accept Project B and reject Project A based on the NPVs

• Accept Project A and reject Project B based on their AARs

• Accept Project A because it has the lower required return