Two Projects Each Require a Current Cash Expenditure of $10,000

question 19

Multiple Choice

Two projects each require a current cash expenditure of $10,000.Project A will generate cash inflows of $2,000 per year for the next twelve years.Project B is expected to return $6,000 in 1 year,$4,000 at the end of year 2,and $3,000 in 3 years.Which project should be selected if funds are unavailable to finance both and capital costs are 6%?

• A) Project B because it has a shorter payback period.
• B) Project B because it has a higher IRR
• C) Project A because it has a higher IRR
• D) Project A because it has a higher NPV
• E) Project B because it has a higher NPV

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Definitions:

Variable Cost

Costs that vary in direct proportion to changes in levels of production or sales, such as materials and labor directly involved in a product's manufacturing.

Units Sold

The total number of units of product sold within a specific time frame.

Conversion Costs

Costs that are incurred to convert raw materials into finished goods, which typically include labor and manufacturing overhead expenses.

Relevant Costs

Costs that should be considered when making business decisions because they will be affected by the decision.