Chandler Tire Co

question 51

Multiple Choice

Chandler Tire Co.is trying to decide which one of two projects it should accept.Both projects have the same start-up costs.Project 1 will produce annual cash flows of $52,000 a year for six years.Project 2 will produce cash flows of $48,000 a year for eight years.The company requires a 15 percent rate of return.Which project should the company select and why?

• A)Project 1, because the annual cash flows are greater by $4,000 than those of Project 2
• B)Project 1, because the present value of its cash inflows exceeds those of Project 2 by $14,211.62
• C)Project 2, because the total cash inflows are $72,000 greater than those of Project 1
• D)Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33
• E)It does not matter as both projects have almost identical present values.

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Definitions:

Fixed Overhead Cost

Costs that do not vary with production volume, such as rent, salaries, and insurance, and must be paid regardless of the level of output or sales.

Ending Inventory

The value of goods available for sale at the end of an accounting period, which will be carried over as the beginning inventory for the next period.

Variable Costing

An accounting method that only considers variable costs (costs that change with production volume) in the cost of production, excluding fixed costs.

Traditional Costing

A costing methodology that assigns overhead costs to products based on volume-related measures such as labor hours or machine hours.