Two Mutually Exclusive Projects, Expected to Last Indefinitely, Are Being

question 21

Multiple Choice

Two mutually exclusive projects, expected to last indefinitely, are being compared. Program A has annual profits and consumer surplus of $10 million and a one-time capital expenditure of $50 million. Program B has consumer surplus of $15 million and a one-time capital expenditure of $100 million. Using net present value as a criterion, which alternative should be selected?

• A) If the discount rate is 12%, Program B should be selected.
• B) If the discount rate is less than 10%, Program B should be selected.
• C) If the discount rate is 22%, neither program should be selected.
• D) The programs have the same net present value regardless of the discount rate used.
• E) Answers if the discount rate is less than 10%, Program B should be selected and if the discount rate is 22%, neither program should be selected are both correct.