Ilona Is Considering Two Projects Both of Which Have an Initial

question 295

Multiple Choice

Ilona is considering two projects both of which have an initial cost of $17,000 and total cash inflows of $21,000. The cash inflows of project A are $6,000, $5,000, $5,000, and $5,000 over the next four years, respectively. The cash inflows for project B are $9,000, $7,000, $3,000 and $2,000 over the next four years, respectively. Which one of the following statements is correct if Ilona requires a 12 % rate of return and has a required discounted payback period of 3.5 years?

• A) Both projects should be accepted.
• B) Neither project ever pays back.
• C) Project A should be accepted and Project B should be rejected.
• D) Project A should be rejected and Project B should be accepted.
• E) Both projects should be rejected even though Project B does pay back.

---

Definitions:

Subduction Zone

A zone in which subduction takes place, either referring to the actual downgoing slab and its surroundings or to the region, including Earth’s surface, above the subducting slab.

Mid-Ocean Ridge

A long mountain range on the floor of the ocean, associated with seafloor spreading.

Island Arc

A generally curved belt of volcanic islands above a subduction zone; also used as an adjective to refer to this setting.

Linear Island Chain

A series of islands aligned in a straight or nearly straight line, often formed by volcanic activity along a tectonic plate boundary.