Suppose Your Firm Is Considering Two Independent Projects with the Cash

question 91

Multiple Choice

Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively.
$$\begin{array}{l}\begin{array} {| l | l | l | l | l | }\hline\text {Time: }&0&1&2&3\\\hline\text {Project A Cash flow:}&-5,000&1,000&3,000&5,000\\\hline\text {Project b Cash flow:}&-10,000&5,000&5,000&5,000\\\hline\end{array}\end{array}$$
Use the NPV 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:

Service Provider

A company or individual that offers services to others in exchange for payment, usually specialized in a particular domain or industry.

Job Order Cost

The accumulation and assignment of costs to a specific job, including labor, materials, and overhead.

Decision Making

The cognitive process of selecting a course of action from among multiple alternatives, often involving risk, uncertainty, or compromise.

Actual Costs

Actual costs represent the total expenses incurred during a specific period for goods produced or services rendered, including materials, labor, and overhead.