Suppose Your Firm Is Considering Two Mutually Exclusive, Required Projects

question 47

Multiple Choice

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively.
$$\begin{array}{l}\begin{array} {| l | l | l | l | l | }\hline\text {Time: }&0&1&2&3\\\hline\text {Project A Cash flow:}&-1,000&300&400&700\\\hline\text {Project b Cash flow:}&-500&200&400&300\\\hline\end{array}\end{array}$$
Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?

• A) Accept both A and B
• B) Accept neither A nor B
• C) Accept A, reject B
• D) Reject A, accept B

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Definitions:

Yielding

The income produced by an investment, typically expressed as a percentage of the investment's cost.

Canada Bonds

Bonds issued by the Canadian government, offering a low-risk investment option with fixed interest payments.

Floating Rate Bond

A bond with an interest rate that is tied to a benchmark, such as LIBOR, and can change over time.

Coupon Payment

A periodic interest payment made to bondholders during the life of a bond.