George, Inc

question 47

Multiple Choice

George, Inc. is considering Project A and Project B, which are two mutually exclusively projects with unequal lives. Project A is an eight-year project that has an initial outlay or cost of $180,000. Its future cash inflows for years 1 through 8 are $38,000.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 $36,000. George uses the equivalent annual annuity (EAA) method and has a discount rate of 11.50%. Will George accept the project?

• A) George accepts Project B because it has a more positive EAA.
• B) George rejects both projects because both have a negative NPV (and thus negative EAA).
• C) George accepts Project A because its EAA is about $2,396 and Project B's EAA is only about $1,097.
• D) George accepts Project A because its NPV (and thus EAA) is positive and Project B's NPV (and thus EAA) is negative.

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Definitions:

Fair Market

The price at which a willing buyer and seller would agree to transact in an open and unrestricted market.

Common Stock

Common stock represents equity ownership in a corporation, where shareholders are entitled to vote on corporate matters and possibly receive dividends.

Reacquired

Refers to previously issued stocks or securities that have been bought back by the issuing company.

Treasury Stock

Shares that were issued and later repurchased by the issuing company, reducing the amount of outstanding stock.