Suppose Your Firm Is Considering Two Independent Projects with the Cash

question 1

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. $$\begin{array} { | l | r | c | c | c | } \hline \text { Time } & 0 & 1 & 2 & 3 \\\hline \text { Project A Cash Flow } & - 5,000 & 1,000 & 3,000 & 5,000 \\\text { Project B Cash Flow } & - 10,000 & 5,000 & 5,000 & 5,000 \\\hline\end{array}$$
Use the MIRR 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:

Sales Discounts

A reduction in the price of goods or services offered to customers, usually to prompt early payment or reward bulk purchases.

Gross Price Method

Gross Price Method involves recording inventory at its gross price, before deducting any trade discounts or rebates.

Allowance for Doubtful Accounts

An accounting concept referring to an estimate of the amount of receivables that may not be collected, which is used to reduce the total accounts receivable reported on the balance sheet.

Prior-Period Adjustments

Adjustments made to the financial statements to correct errors or omissions in previously issued financial statements from prior periods.