Assume That You Are Comparing Two Mutually Exclusive Projects

question 70

Multiple Choice

Assume that you are comparing two mutually exclusive projects. Which of the following statements is most correct?

• A) The NPV and IRR rules will always lead to the same decision unless one or both of the projects are "non-normal" in the sense of having only one change of sign in the cash flow stream, i.e., one or more initial cash outflows (the investment) followed by a series of cash inflows.
• B) If a conflict exists between the NPV and the IRR, the conflict can always be eliminated by dropping the IRR and replacing it with the MIRR.
• C) There will be a meaningful (as opposed to irrelevant) conflict only if the projects' NPV profiles cross, and even then, only if the cost of capital is to the left of (or lower than) the discount rate at which the crossover occurs.
• D) Statements a, b, and c are true.

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Definitions:

Manufacturing Costs

The total expense incurred in the process of producing or manufacturing goods, including direct materials, direct labor, and manufacturing overhead.

Job Cost

The total expense of materials, labor, and overhead assigned to an individual job or project.

Manufacturing Costs

The total expenses involved in the production of goods, including raw materials, labor, and factory overhead.

Plantwide Predetermined Manufacturing Overhead Rate

A single overhead rate calculated using the total estimated overhead costs for a factory divided by the estimated amount of base activity, applied uniformly across all products.