Creative Furniture Is Considering Two Mutually Exclusive Projects That Would

question 2

Multiple Choice

Creative Furniture is considering two mutually exclusive projects that would automate part of their production facilities.Project A costs $120,000 and would produce net cash flows of $37,000 annually for 5 years.Project B also costs $120,000 and will produce annual net cash flows of $25,000 for 10 years.Creative's cost of capital is 11 percent.Using a replacement chain, which project should be chosen? Assume that in 5 years, Project A will still cost $120,000 and produce 5 more years of $37,000 annual net cash flows.

• A)Project B.NPV of A is negative
• B)Project A.NPV of B is negative
• C)Project B.NPV is $492 higher
• D)Project A.NPV is $6,468 higher

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Definitions:

Contributory Plan

A retirement or insurance plan where both the employer and employees contribute to the fund.

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Tax-advantaged savings accounts in Canada designed to help individuals save for their retirement.

Defined Non-contributory Plan

A type of pension plan where the employer bears the entire cost of the contributions without requiring contributions from the employees.

Collective Bargaining Agreement

A written legal contract between an employer and a union representing the employees, outlining the terms of employment.