You Are Considering the Following Two Mutually Exclusive Projects with the Following

question 96

Multiple Choice

You are considering the following two mutually exclusive projects with the following cash flows. Both projects will be depreciated using straight-line depreciation to a zero book value over the life
Of the project. Neither project has any salvage value. You should accept Project ____ because it has the _____ profitability index of the two projects.

• A) A; higher
• B) A; lower
• C) B; higher
• D) B; lower
• E) The profitability index should not be used to determine which of these projects should be accepted.

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Definitions:

Profit Recognition

The process of reporting income when it is earned and realized or realizable, following accounting principles.

Line-By-Line Method

An accounting technique used in consolidation, where the parent company combines each item of the subsidiary's financial statements with its own, item by item.

Fair Value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Carrying Amount

The amount at which an asset or liability is recognized in the balance sheet after deducting accumulated depreciation, impairment, and amortization.