Project a Has an Initial Cost of $628,000 and Project

question 43

Multiple Choice

Project A has an initial cost of $628,000 and Project B has an initial cost of $894,000.Both projects have a positive NPV.Which one of these would be your best next step to determine which project to accept assuming the projects are mutually exclusive?

• A)Compute the discounted payback for both projects and select the project with the shortest payback period
• B)Compute the IRR for each project and select the project with the higher IRR value
• C)Compute the AAR for both projects and accept the project with the higher AAR value
• D)Compute the PI of both projects and select the project with the lower PI value
• E)Compute the IRR on the differences obtained by subtracting Project A's cash flows from those of Project B

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Definitions:

Marginal Revenue

The additional earnings obtained from selling one more unit of a product or service.

Demand Schedule

A table that shows the relationship between the price of a good and the quantity demanded.

Monopoly

A market structure dominated by a single seller, facing no competition in offering a unique product or service, allowing them to control prices and market conditions.

Network Externalities

The effect that an additional user of a good or service has on the value of that product to others, often increasing the product's value as the user base grows.