Consider the Following Projects, X and Y Where the Firm

question 124

Multiple Choice

Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent?

• A) Project X, since it has a higher NPV than Project Y
• B) Project Y, since it has a higher NPV than Project X
• C) neither, since both the projects have negative NPV
• D) neither, since both the projects have positive NPV

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Definitions:

Conversion Costs

Costs associated with converting raw materials into finished goods, typically including both labor and overhead expenses in manufacturing.

Work In Process

Inventory items that are currently being manufactured but are not yet complete, representing a business's partially finished goods.

First-In, First-Out

A method of inventory valuation where goods purchased or produced first are sold first, assuming costs rise over time.

Total Cost

The aggregate amount of money spent or cost incurred in the production of goods or services.