A Firm Utilizes a Strategy of Capital Rationing, Which Is

question 68

Multiple Choice

A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following two projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000; year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year 1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 6% cost of capital, which decision should the financial manager make?

• A) Select project A.
• B) Select project B.
• C) Do not select either project.
• D) Select both projects.

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Definitions:

Peripheral-Route Processing

A method of persuasion that relies on superficial cues and heuristics, such as the attractiveness of the speaker, instead of the quality of the argument.

Credible

Being believable or worthy of trust based on evidence or reasoning.

Central Route

A method of persuasion that involves deep thinking and the logical processing of information, leading to lasting attitude change.

Persuasion

The act of convincing others to change their mind or take a certain action through effective communication or argumentation.