Project I Has an Initial Cash Outflow of $18,300 and Annual

question 39

Multiple Choice

Project I has an initial cash outflow of $18,300 and annual cash flows of $8,700 for Years 1 to 3.Project II has an initial cash outflow of $25,400 and annual cash flows of $10,500 for Years 1 to 3.These projects are mutually exclusive.The required rate of return is 11 percent.Based on the incremental NPV_{(II - I) ,} which project(s) should be accepted and why?

• A)Project II;because the incremental NPV_{(II - I)} is negative
• B)Project I;because both the incremental NPV_{(II - I)} and NPV_I are positive
• C)Both Project I and II;because both project NPVs are positive
• D)Project II;because it has the larger NPV
• E)Project I;because the incremental NPV_{(II - I)} is negative and NPV_I is positive

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Definitions:

Long Call

A long call is an options trading strategy where the investor purchases a call option with the expectation that the underlying stock will increase in value before the option expires.

Strike Price

The fixed price at which the owner of an option can buy (in case of a call option) or sell (in case of a put option) the underlying asset.

Break-Even Point

The financial position at which cost and revenue are equal, resulting in neither profit nor loss.

Break-Even Point

The point at which total costs and total revenues are equal, meaning no profit or loss occurs.