Two Firms Evaluated the Same Capital Budgeting Project to Determine

question 41

Multiple Choice

Two firms evaluated the same capital budgeting project to determine whether to purchase it.The CFO of Anchor Weights Corporation (AWC) reported that she determined that the project's internal rate of return equals 9 percent,and she recommended that the project be purchased.The CFO of Sectional Spas Incorporated (SSI) simply reported that the project was unacceptable to his firm when he evaluated it using one of the capital budgeting techniques that consider the time value of money.Given this information,which of the following statements is correct?

• A) The net present value of the project must be positive for both firms.
• B) If the SSI's CFO computes the IRR for the project,he will find that it is less than 9 percent for his company.
• C) AWC's CFO must have used the traditional payback period method to evaluate the project.
• D) If the project is acceptable (unacceptable)to one firm,it must be acceptable (unacceptable)to both firms.As a result,one of the CFOs made a mistake when evaluating the project.
• E) SSI's must have a required rate of return that is greater than 9 percent.

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Definitions:

Depreciation Expense

A financial accounting method used to allocate the cost of a tangible asset over its useful life.

Double-Declining-Balance

An accelerated method of depreciation that doubles the rate at which an asset's book value declines compared to the straight-line method.

Salvage Value

The calculated resale worth of an asset at the close of its efficient lifespan.

Depreciation

The allocation process of a tangible asset's cost over the period it is useful.