Suppose Your Firm Is Considering Two Independent Projects with the Cash

question 55

Multiple Choice

Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively. $$\begin{array} { | l | c | c | l | l | } \hline \text { Time } & 0 & 1 & 2 & 3 \\\hline \text { Project A Cash Flow } & - 5,000 & 1,000 & 3,000 & 5,000 \\\text { Project B Cash Flow } & - 10,000 & 5,000 & 5,000 & 5,000 \\\hline\end{array}$$
Use the IRR 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

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Definitions:

Constant In Total

A term that refers to a cost or expense that remains unchanged in total, regardless of changes in the related level of activity or volume.

Break-Even Point

The level of activity at which total revenue equals total costs.

Total Sales

Total Sales represents the aggregate revenue a company generates from selling its goods or services within a specific period before any expenses are deducted.

Variable Costs

Costs that vary directly with the level of production or volume of output.