Matt Is Analyzing Two Mutually Exclusive Projects of Similar Size

question 87

Multiple Choice

Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data.Both projects have 5 year lives. $$\begin{array} { l l l } & \frac { \text { Project } \mathrm { A } } { } & \frac { \text { Project B } } { } \\\text { Net present value } & \$ 15,090 & \$ 14,693 \\\text { Payback period } & 2.76 \text { years } & 2.51 \text { years } \\\text { Required return } & 8.3 \% & 8.0 \%\end{array}$$ Matt has been asked for his best recommendation given this information.His recommendation should be to accept:

• A)project B because it has the shortest payback period.
• B)both projects as they both have positive net present values.
• C)project A and reject project B based on their net present values.
• D)project B and reject project A based on other criteria not mentioned in the problem.
• E)project B and reject project A based on both the payback period and the average accounting return.

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Definitions:

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including materials and labor.

Absorption Costing

An accounting method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a product.

Fixed Costs

Expenses that do not change in proportion to the activity of a business, such as rent, salaries, and equipment costs.

Net Income

The net income of a business following the deduction of all costs and taxes from its earnings.