When Ranking Two Mutually Exclusive Investments with Different Initial Amounts

question 101

Multiple Choice

When ranking two mutually exclusive investments with different initial amounts but approximately the same useful life, and assuming no capital rationing, management should give priority to the project:

• A) That generates cash flows for the longer period of time.
• B) Whose net after-tax cash flows equal the initial investment outlay.
• C) That has the greater accounting rate of return (ARR).
• D) Whose cash flows vary the least.
• E) That has the higher net present value (NPV).

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Definitions:

Rational Self-Interest

The principle that individuals tend to make decisions that maximize their own utility or benefit, underpinning much of economic theory.

Economic Decision Makers

Individuals or entities responsible for choosing what to produce, how to produce, and for whom to produce in an economy, including households, businesses, and governments.

Welfare

Government-provided support for those unable to support themselves, including financial assistance, healthcare, and social services.

Rational Self-Interest

The principle that individuals tend to make decisions based on their own benefit, guided by the information available to them and their own preferences.