Two Projects Being Considered Are Mutually Exclusive and Have the Following

question 39

Multiple Choice

Two projects being considered are mutually exclusive and have the following cash flows: $\begin{array}{lll}\underline{\text { Year }} & \underline{\text { Project A}} &\underline{\text { Project B}}\\0 & -\$ 50,000 & -\$ 50,000 \\1 & 15,625 & 0 \\2 & 15,625 & 0 \\3 & 15,625 & 0 \\4 & 15,625 & 0 \\5 & 15,625 & 99,500\end{array}$ If the required rate of return on these projects is 10 percent, which would be chosen and why?

• A)Project B because of higher NPV.
• B)Project B because of higher IRR.
• C)Project A because of higher NPV.
• D)Project A because of higher IRR.
• E)Neither, because both have IRRs less than the cost of capital.

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Definitions:

Carrying Amount

The book value of assets and liabilities as reported in the financial statements, factoring in depreciation, amortization, and impairment.

Voting Shares

Shares that give the shareholder the right to vote on matters of corporate policy and the selection of board members.

Investment Account

A financial account held at a bank or brokerage that is used to hold securities, stocks, bonds, and other investments.

Unamortized Acquisition Differential

The portion of the difference between the purchase price and the book value of an acquired entity that has not yet been amortized.