Assume That the Economy Is in a Mild Recession, and as a Result

question 71

Multiple Choice

Assume that the economy is in a mild recession, and as a result interest rates and money costs generally are relatively low. The WACC for two mutually exclusive projects that are being considered is 8%. Project S has an IRR of 20% while Project L's IRR is 15%. The projects have the same NPV at the 8% current WACC. However, you believe that the economy is about to recover, and money costs and thus your WACC will also increase. You also think that the projects will not be funded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?

• A) You should reject both projects because they will both have negative NPVs under the new conditions.
• B) You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market.
• C) You should recommend Project L, because at the new WACC it will have the higher NPV.
• D) You should recommend Project S, because at the new WACC it will have the higher NPV.
• E) You should recommend Project S because it has the higher IRR and will continue to have the higher IRR even at the new WACC.

Calculate production quantities and purchasing requirements based on sales forecasts.

Understand the impact of inventory policies and material requirements on the budget.

Evaluate budget variances and their implications for business performance.

Understand the relationship between direct labor, variable overhead, and their budgeted costs.

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Definitions:

British Slave Societies

Societies in British colonies where the economy and social structures were heavily dependent on slavery, especially notable in the Caribbean during the 17th to 19th centuries.

Protestant North America

Regions in North America where Protestant Christianity is a dominant religious influence, reflecting in the culture and society.

Caribbean Island

Islands in the Caribbean Sea, noted for their diverse cultures, histories of colonialism, and roles in the African diaspora.

England

A country in Europe that is part of the United Kingdom, known for its rich history, monarchy, and contributions to culture and science.