Project H Requires an Initial Investment of $100,000 and the Produces

question 104

Multiple Choice

Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years. Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1, $40,000 in year 2, and $70,000 in year 3. If the discount rate increases from 10% to 16%

• A) Project T should be chosen.
• B) Both projects should be rejected.
• C) H and T are equally attractive.
• D) The project rankings will change.

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Definitions:

Amortization

The method of distributing a loan across a sequence of consistent installments over a period.

Principal Balance

The remaining amount of money borrowed or invested, excluding any interest or fees.

Compounded Semi-annually

Interest on an investment or loan is calculated and added to the principal twice a year.

Amortization Schedule

A table detailing each periodic payment on an amortizing loan, showing amounts toward principal and interest and the remaining balance after each payment.