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:

Dessication

the process of drying out or dehydrating, often leading to the death of plants and animals in an ecosystem.

Deforestation

The large-scale removal of trees from forests or jungles, often to clear land for agricultural, residential or commercial development.

Overgrazing

The depletion of vegetation due to continuous feeding by an excessive number of grazing animals, leading to land degradation.

Water Scarcity

A situation in which the available water resources are insufficient to meet the demands of a region.