Two Projects Being Considered by a Firm Are Mutually Exclusive

question 197

Multiple Choice

Two projects being considered by a firm are mutually exclusive and have the following projected cash flows: Based only on the information given, which of the two projects would be preferred, and why?

• A) Project A, because it has a shorter payback period.
• B) Project B, because it has a higher IRR.
• C) Indifferent, because the projects have equal IRRs.
• D) Include both in the capital budget, since the sum of the cash inflows exceeds the initial investment in both cases.
• E) Choose neither, since their NPVs are negative.

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Definitions:

Working Capital

The difference between a company's current assets and its current liabilities, indicating the short-term liquidity of the business.

Income Tax Rate

The proportion of earnings handed over to the government as tax.

After-Tax Discount Rate

The discount rate that takes into account the effect of taxes on the net income from an investment.

Straight-Line Depreciation

A tactic for parceling out the expense of a tangible asset through its effective duration in equal yearly quotas.