Zellars,Inc

question 103

Multiple Choice

Zellars,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Zellars,Inc.'s required rate of return for these projects is 10%.Which project would you recommend using the replacement chain method to evaluate the projects with different lives?

• A) Project B because its NPV is higher than Project A's replacement chain NPV of $47,623.
• B) Project A because its replacement chain NPV is $76,652, which exceeds the NPV for Project B.
• C) Project A because its replacement chain NPV is $45,642, which is less than the NPV for Project B.
• D) Both projects will be valued the same since they are now both four year projects.

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Definitions:

Opportunity Cost

The cost of forgoing the next best alternative when making a decision, representing potential benefits missed.

Differential Revenue

The additional revenue that is generated from choosing one alternative over another in decision-making processes.

Differential Analysis

The process of comparing the financial differences between alternative business decisions or scenarios, focusing on costs and benefits that change between options.

Differential Cost

The difference in cost between two alternative decisions or changes in output levels.