You Are Evaluating Two Projects

question 71

Multiple Choice

You are evaluating two projects.You may accept only one of them.Project one will cost $379,000 initially and will pay $134,000 each year for the next 5 years.Project two will cost $454,000 initially,but will pay $101,000 for the next 10 years.The firm's cost of capital is 15%.Compute the NPV of each project.Which project has the highest NPV and by how much? Round your answers to the nearest dollar.

• A) Project 2 has a higher NPV by $17,293.
• B) Project 2 has a higher NPV by $37,636.
• C) Project 1 has a higher NPV by $17,293.
• D) Project 1 has a higher NPV by $37,636.
• E) The two projects have equal NPV.

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Definitions:

Control Group

In scientific research, a group of subjects or entities kept under standard conditions to serve as a comparison against a group where experimental variables are altered.

Leakage

In economic terms, refers to the loss of funds through non-productive means, such as untaxed income or unrecorded sales.

False Positive

An error in data testing or diagnostic screening in which a test result improperly indicates the presence of a condition.

Leakage

The escape of resources from one part of an economy to another, often referring to money that is not retained within a local system.