Suppose Your Firm Is Considering Two Independent Projects with the Cash

question 113

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 payback 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:

Standard IQ

represents a measure of an individual's intelligence quotient, calculated based on standardized tests, adjusted to have a mean of 100 and a standard deviation.

Poor Reliability

The lack of consistency in the outcomes of a measure or test over time.

Poor Validity

Refers to the degree to which an assessment or measurement tool fails to accurately reflect the concept it is intended to measure.

Flynn Effect

The observation that IQ scores have historically increased from one generation to another, worldwide.