Crossborder,Inc

question 68

Multiple Choice

Crossborder,Inc.is considering Project A and Project B,which are two mutually exclusive projects with unequal lives.Project A is an eight-year project that has an initial outlay or cost of $140,000.Its future cash inflows for years 1 through 8 are the same at $36,500.Project B is a six-year project that has an initial outlay or cost of $160,000.Its future cash inflows for years 1 through 6 are the same at $48,000.Crossborder uses the equivalent annual annuity (EAA) method and has a discount rate of 13%.Which project(s) ,if any,will Crossborder accept?

• A)Crossborder will take Project B because it has a positive NPV and its EAA is greater than that for Project A.
• B)Crossborder rejects both projects because both have a negative NPV (and thus negative EAA).
• C)Crossborder accepts both projects because both have a positive NPV (and thus positive EAA).
• D)Crossborder accepts Project A because its EAA of about $7,975 is greater than Project B's EAA of about $6,440.

Understand the fundamental differences between neoclassical and behavioral economics.

Recognize how behavioral economics explains the influence of cognitive biases and heuristics on decision making.

Identify the factors affecting human decision making, including the impact of framing, temptation, and future versus present preferences.

Understand the concept of "bounded rationality" and its significance in behavioral economics.

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Definitions:

Creditor

An individual or institution that lends money or extends credit to another entity.

Interim Statements

Financial statements prepared for a period shorter than a financial year, typically quarterly or semi-annually, to provide a more immediate financial status of the company.

Insurance

A financial product that provides protection against financial losses from specified risks, such as accidents, theft, or natural disasters.

Fiscal Year

A one-year period that companies and governments use for accounting purposes and preparing financial statements, which may or may not align with the calendar year.