Consider Two Projects, a and B

question 140

Multiple Choice

Consider two projects, A and B. The present value (PV) of after-tax cash inflows for project A is $55,000, while the original investment outlay for this project is $50,000. Project B, on the other hand, has the following characteristics: PV of after-tax cash inflows = $24,000; original investment outlay = $20,000. Assume that these two projects are mutually exclusive and that the company has adequate capital to fund either investment option. All the following statements are true except:

• A) The NPV of Project A is $5,000.
• B) The IRR of Project A is greater than the cost of capital (discount rate).
• C) The profitability index (PI) for Project A is 1:1.
• D) Project A is preferable to Project B (all else held constant).
• E) The economic rate of return on Project A exceeds the discount rate.

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Definitions:

Ticket Prices

The cost required to purchase a ticket for entry to an event, such as a movie, concert, or sporting event.

Transaction Costs

The costs to individuals of making a deal.

Rent Controls

Government-imposed limits on the amount landlords can charge for renting out a property.

Equilibrium Rent

The rental price at which the quantity of rental property demanded equals the quantity supplied, leading to a market balance with no excess demand or supply.