Suppose Your Firm Is Considering Two Mutually Exclusive, Required Projects

question 71

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 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively. $$\begin{array} { l l l l l } \text { Time } & 0 & 1 & 2 & 3 \\\text { Project A Cash Flow } & - 1,000 & 300 & 400 & 700 \\\text { Project B Cash Flow } & - 500 & 200 & 400 & 300\end{array}$$ Use the discounted 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

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Definitions:

Maturity

The specified time in the future when the principal amount of a financial instrument, such as a bond, becomes due and is repaid to the investor.

Bonds

Fixed-income investments representing loans made by an investor to a borrower, typically corporate or governmental.

Real Rate Of Return

The annual rate of return on an investment, adjusted for inflation, reflecting the actual purchasing power of the earnings.

Quoted Price

The stated price at which an asset or service can be bought or sold in the market.