Two Projects Being Considered by a Firm Are Mutually Exclusive

question 54

Multiple Choice

Two projects being considered by a firm are mutually exclusive and have the following projected cash flows: $\begin{array}{lll}\underline{\text { Year }} &\underline{ \text { Project A }}&\underline{ \text { Project B }}\\0 & (\$ 100,00) & (\$ 100,000 \\1 & 39,500 & 0 \\2 & 39,500 & 0 \\3 & 39,500 & 133,000\end{array}$ Based only on the information given, which of the two projects would be preferred, and why?

• A)Project A, because it has a shorter payback period.
• B)Project B, because it has a higher IRR.
• C)Indifferent, because the projects have equal IRRs.
• D)Include both in the capital budget, since the sum of the cash inflows exceeds the initial investment in both cases.
• E)Choose neither, since their NPVs are negative.

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Definitions:

Reduction

The process of decreasing the amount, size, or intensity of something.

Invoices

Official documents issued by a seller to a buyer, detailing the products or services sold, their prices, and the total amount owed.

Trade Discount

A reduction in the list price granted by wholesalers or manufacturers to retailers or other buyers in the same trade to encourage bulk purchasing.

Suggested List Price

Refers to the price that manufacturers propose retailers sell a product for, serving as a guideline.