Two Mutually Exclusive Projects Have 3-Year Lives and a Required

question 18

Multiple Choice

Two mutually exclusive projects have 3-year lives and a required rate of return of 10.5 percent.Project A costs $75,000 and has cash flows of $18,500,$42,900,and $28,600 for Years 1 to 3,respectively.Project B costs $72,000 and has cash flows of $22,000,$38,000,and $26,500 for Years 1 to 3,respectively.Using the IRR,which project,or projects,if either,should be accepted?

• A)Accept both projects
• B)Select either project as there is no significant difference between them
• C)Accept Project A and reject Project B.
• D)Accept Project B and reject Project A.
• E)Reject both projects

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Definitions:

Permanently Disabled

A condition where an individual is unable to engage in any substantial gainful activity due to a physical or mental impairment that can be expected to result in death or has lasted or can be expected to last for a continuous period of not less than 12 months.

Guaranteed Insurability

An optional provision in an insurance contract that allows the insured to pay an extra premium initially in exchange for a guaranteed option to buy more insurance at certain specified times later on with no questions asked and no medical examination required.

Premiums

Payments made for insurance coverage, often periodically, to keep the insurance policy active and the insured protected against specified risks.

Insurable Interest

The financial interest that a policyholder has in the person or property that is insured.