Quorex Is Evaluating Two Mutually Exclusive Projects

question 17

Multiple Choice

Quorex is evaluating two mutually exclusive projects. Project A has a net investment of $48,000 and net cash flows over a six-year period of $12,500 per year. Project B also has a net investment of $48,000, but its net cash flows of $8,640 per year will occur over a 12-year period. If Quorex has a cost of capital of 14% for these projects, which project, if either, should be chosen, and what is its NPV?

• A) Project A, $862
• B) Project A, $1,800
• C) Project B, $2,475
• D) Project B, $902

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Definitions:

Machine-Hours

A measure of production activity that quantifies the number of hours machines are operated in the production process.

Fixed Component

A cost that does not change with the level of output or activity over a particular period of time.

Predetermined Overhead Rate

A rate used to allocate manufacturing overhead to individual units of production, based on estimated costs rather than actual costs.

Volume Variance

A measurement of the difference between the actual production volume and the expected (or budgeted) production volume, affecting the costs incurred.