Quick Flick Is Considering Two Investments ? Quick Uses a Combination of the Net Present Value

question 54

Multiple Choice

Quick Flick is considering two investments. Both require a net investment of $120,000 and have the following net cash flows: $$\begin{array} { l l l } \text { Year } & \text { Project } \mathrm { X } & \text { Project Y } \\1 & \$ 50,000 & \$ 25,000 \\2 & \$ 40,000 & \$ 45,000 \\3 & \$ 30,000 & \$ 50,000 \\4 & \$ 25,000 & \$ 60,000 \\5 & \$ 20,000 & \$ 70,000\end{array}$$ ? Quick uses a combination of the net present value approach and the payback approach to evaluate investment alternatives. The firm uses a discount rate of 14 percent and requires that all projects have a payback period no longer than 3 years. Which investment or investments should Quick accept?

• A) only Project X
• B) only Project Y
• C) both projects X and Y
• D) reject both projects

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Definitions:

Monopolistically Competitive

Characterizing a market environment where several sellers offer differentiated products, resulting in non-price competitive strategies.

Price-Taker

An economic agent (e.g., a firm or consumer) that has no control over the market price and must accept prices as given.

Economic Profit

The surplus achieved when total revenue exceeds the opportunity costs of all resources used in production.

Monopolistically Competitive

A market structure characterized by many firms offering products that are similar but not identical, leading to competition based on factors other than price.