Chandler Tire Co

question 12

Multiple Choice

Chandler Tire Co.is trying to decide which one of two projects it should accept.Both projects have the same start-up costs.Project 1 will produce annual cash flows of $52,000 a year for six years.Project 2 will produce cash flows of $48,000 a year for eight years.The company requires a 15 percent rate of return.Which project should the company select and why?

• A)Project 1, because the annual cash flows are greater than those of Project 2
• B)Project 1, because the present value of its cash inflows exceeds those of Project 2 by $14,211.62
• C)Project 2, because the total cash inflows are $70,000 greater than those of Project 1
• D)Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33
• E)It does not matter as both projects have almost identical present values.

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Definitions:

Gross Sales

The total sales revenue of a company without any deductions for returns, allowances, or discounts.

Indirect Advertising Costs

Expenses related to advertising that are not directly associated with a specific advertising medium or campaign, such as salaries of marketing staff or overhead costs.

Allocated

The process of apportioning resources, costs, or expenses to specific projects, departments, or cost centers.

Gross Sales

The total sales revenue of a business before any deductions are made for returns, allowances, and discounts.