Suppose Your Firm Is Considering Two Mutually Exclusive, Required Projects

question 73

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. $$\begin{array} { l l l l l } \text { Time } & 0 & 1 & 2 & 3 \\\text { Project A Cash Flow } & - 20,000 & 10,000 & 30,000 & 1,000 \\\text { Project B Cash Flow } & - 30,000 & 10,000 & 20,000 & 50,000\end{array}$$ 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:

Apples

A common fruit that is edible, coming in various varieties and used both for eating raw and in cooking.

Bananas

A long, curved fruit with a soft, edible inner part and a yellow skin when ripe, commonly eaten as a snack or used in cooking and baking.

Utility Function

In economics, a representation of preferences over a set of goods and services by assigning values, indicating the level of satisfaction or utility derived from them.

Nuts

Edible seeds enclosed in a hard shell, often used as a source of nutrients and energy.