You Are Evaluating Two Projects

question 48

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%.Use the replacement chain approach to 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 $240,619.
• B) Project 2 has a higher NPV by $52,189.
• C) Project 1 has a higher NPV by $240,619.
• D) Project 1 has a higher NPV by $52,189.
• E) The two projects have equal NPV.

---

Definitions:

P-Value

The p-value is a measure in statistical hypothesis testing that indicates the probability of obtaining test results at least as extreme as the ones observed, assuming the null hypothesis is true.

Level of Significance

The threshold under which a statistical result is considered statistically significant, traditionally set at 0.05 or 5%.

Degrees of Freedom

The number of independent values or quantities which can be assigned to a statistical distribution or parameter estimate, impacting the shape and scale of the distribution.

Rule of 5

An empirical rule suggesting that a sample of size five is often sufficient for capturing the median of a population, specifically under conditions reflected in the five-number summary.