Suppose Your Firm Is Considering Two Mutually Exclusive, Required Projects

question 69

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 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

---

Definitions:

Accrued Interest

Interest accumulated but not yet paid.

Investment in Bonds

A financial strategy involving the purchase of bond securities, aiming to earn interest income and potentially benefit from bond value appreciation.

Bonds

Fixed-income investment products that represent loans made by an investor to a borrower, typically corporate or governmental, which is obligated to pay back with interest.

Comprehensive Income

The total change in equity for a reporting period other than from transactions with owners, encompassing all revenues, gains, expenses, and losses.