Suppose Your Firm Is Considering Two Mutually Exclusive, Required Projects

question 19

Multiple Choice

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively. $$\begin{array} { | l | c | c | c | c | } \hline \text { Time } & 0 & 1 & 2 & 3 \\\hline \text { Project A Cash Flow } & - 20,000 & 10,000 & 30,000 & 1,000 \\\text { Project B Cash Flow } & - 30,000 & 10,000 & 20,000 & 50,000 \\\hline\end{array}$$
Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

• A)Accept both A and B
• B)Accept neither A nor B
• C)Accept A, reject B
• D)Reject A, accept B

---

Definitions:

Creativity

The ability to produce new and valuable ideas.

Availability Heuristic

A cognitive shortcut that relies on immediate examples that come to a person’s mind when evaluating a specific topic, concept, method or decision.

Likelihood

Refers to the probability or chance of an event occurring.

Occurrence

The fact or frequency of something happening or being present in a place or situation.