Ace Inc Is Evaluating Two Mutually Exclusive Projects-Project a and Project

question 6

Multiple Choice

Ace Inc. is evaluating two mutually exclusive projects-Project A and Project B. The initial cash outflow is $50,000 for each project. Project A results in cash inflows of $15,625 at the end of each of the next five years. Project B results in one cash inflow of $99,500 at the end of the fifth year. The required rate of return of Ace Inc. is 10 percent. Ace Inc. should invest in:

• A) Project B because it has no cash inflows in the first four years of its life.
• B) Project B because it has a higher net present value (NPV).
• C) Project A because it will yield cash every year for five years.
• D) Project A because it has a positive net present value (NPV).
• E) Project A because it will generate cash in the initial years of its life.

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Definitions:

Normal Capacity

The average level of operational output that can be sustained over a period under normal conditions, taking into account regular downtime and maintenance.

Standard Costs

Standard costs are predetermined or estimated prices used to measure the efficiency of operations and the performance of a company against set benchmarks.

Financial Statements

Formal records of the financial activities and position of a business, individual, or other entity, including the balance sheet, income statement, and statement of cash flows.

Overhead Controllable Variance

The difference between the actual overhead incurred and the overhead that management expected or budgeted for, which is within their control.