Project a Has an NPV of $20,000 and a PI

question 82

Multiple Choice

Project A has an NPV of $20,000 and a PI of 1.2.Project B has an NPV of $10,000 and a PI of 1.3.Both projects have equal lives.Which project should be preferred if we are NOT concerned with capital rationing (that is,we are NOT concerned with being short of funds) ?

• A)We should prefer Project B since it has a higher PI.
• B)We should compute the EAA before we make any decision.
• C)We should prefer Project A since it has a higher NPV.
• D)We should prefer Project B if it has a higher IRR.

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Definitions:

Incremental Cash Flows

The additional cash flows a business expects to generate from taking on a new project or making an investment decision.

After-Tax Salvage Value

The net value of an asset after it has been disposed of and all related taxes have been paid.

Capital Budgeting Analysis

The process of evaluating and selecting long-term investments that are in line with the goal of an investor or firm's strategic plan.

Capital Cost Allowance

A tax deduction in some jurisdictions that allows businesses to claim depreciation on tangible capital assets as an expense against taxable income.