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BC Co has identified two mutually exclusive projects which have an equivalent effect on the risk profile of the company. Project 1 has a payback period of 2.8 years, an NPV of $17,200, an internal rate of return of 18% and an average accounting rate of return of 19%. Project 2 has a payback period of 3.2 years, an NPV of $15,700, an internal rate of return of 22% and an average accounting rate of return of 21%. The cost of capital is 15%. Assuming that the directors wish to maximise shareholder wealth and no shortage of capital is expected, which project should the company choose? A. Project 2 because it has the higher internal rate of return. B. Project 1 because it has the shorter payback period. C. Project 1 because it has the higher net present value. D. Project 2 because it has the higher accounting rate of return. |