A Firm Can Invest in One of Two Projects-The Purchase

question 8

Multiple Choice

A firm can invest in one of two projects-the purchase of new delivery vans or the training of its sales staff in the use of new sales techniques. Both projects cost the same amount of money. The purchase of new delivery vans is expected to reduce costs by $5,000 each year for 10 years. The training of the sales staff in the use of a new sales technique is expected to increase revenues by $5,000 each year for 5 years. Which of the following is true?

• A) Each of these projects would have the same expected rate of return, as they both cost the same.
• B) The training of the sales staff would have the higher expected rate of return, as it increases revenues whereas the purchase of delivery vans only reduces costs.
• C) The purchase of delivery vans would have the higher expected rate of return, as it will reduce costs for a longer time period than the sales staff training will increase revenues.
• D) The expected rates of return for these two projects cannot be compared, as one project reduces costs and the other increases revenues.

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