Suppose Your Firm Is Considering Two Mutually Exclusive, Required Projects

question 53

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 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively.
$$\begin{array}{l}\begin{array} {| l | l | l | l | l | }\hline\text {Time: }&0&1&2&3\\\hline\text {Project A Cash flow:}&-20,000&10,000&30,000&1,000\\\hline\text {Project b Cash flow:}&-30,000&10,000&20,000&50,000\\\hline\end{array}\end{array}$$
Use the MIRR 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:

Agency

A relationship where one party, the agent, is authorized to act on behalf of another, the principal, in dealings with third parties.

Necessity

The condition or situation of being required or indispensable, often invoked in legal contexts where actions are taken out of an unavoidable need.

Contract

A legally binding agreement between two or more parties.

Warranty of Authority

An assurance provided by an agent to a third party that they have the authority to act on behalf of another person or entity in a legal or business transaction.