Two Firms Evaluated the Same Capital Budgeting Project to Determine

question 15

Multiple Choice

Two firms evaluated the same capital budgeting project to determine whether to purchase it.The CFO of Anchor Weights Corporation (AWC) reported that she determined that the project's internal rate of return equals 9 percent, and she recommended that the project be purchased.The CFO of Sectional Spas Incorporated (SSI) simply reported that the project was unacceptable to his firm when he evaluated it using one of the capital budgeting techniques that considers the time value of money.Given this information, which of the following statements is correct?

• A)The net present value of the project must be positive for both firms.
• B)If the SSI's CFO computes the IRR for the project, he will find that it is less than 9 percent for his company.
• C)AWC's CFO must have used the traditional payback period method to evaluate the project.
• D)If the project is acceptable (unacceptable) to one firm, it must be acceptable (unacceptable) to both firms.As a result, one of the CFOs made a mistake when evaluating the project.
• E)SSI's must have a required rate of return that is greater than 9 percent.

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Definitions:

Random Variable

A random variable represents numerical outcomes of random phenomena or experiments, varying in value based on the outcomes of the process.

Standard Normal Distribution

A probability distribution that has a mean of 0 and a standard deviation of 1, representing a bell-shaped curve.

99th Percentile

A value below which 99% of the data points in a data set fall, used as a measure of statistical distribution.

Z Distribution

A statistical distribution that describes the distribution of standardized values; it's used in inference regarding mean of normally distributed populations when the standard deviation is known.