Juan Is Considering Two Independent Projects

question 61

Multiple Choice

Juan is considering two independent projects.Project A costs $74,600 and has projected cash flows of $18,700,$46,300,and $12,200 for Years 1 to 3,respectively.Project B costs $70,000 and has cash flows of $10,600,$15,800,and $67,900 for Years 1 to 3,respectively.Juan assigns a discount rate of 10 percent to Project A and 12 percent to Project B.Which project or projects,if either,should he accept based on the profitability index rule?

• A)Accept both projects.
• B)Accept Project A and reject Project B.
• C)Accept either A or B,but not both.
• D)Reject both projects.
• E)Accept Project B and reject Project A.

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Definitions:

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows over a period of time, used in capital budgeting to analyze the profitability of an investment.

Profitability Index

A financial tool used to evaluate the desirability of an investment, calculated as the present value of future cash flows divided by the initial investment.

Net Cash Flow

The variance between the cash coming into and going out of a business within a given timeframe.

Discount Rate

The interest rate used to discount future cash flows to their present value, enabling comparison of the value of investments made at different times.