Consider the following cash flows for two mutually exclusive capital investment projects. The required rate of...

80.2K

Verified Solution

Question

Finance

Consider the following cash flows for two mutually exclusivecapital investment projects. The required rate of return is 15%.Use this
Year         Project ACash Flow        Project BCash Flow
0                         -$40,000                           -$30,000
1                              12,000                            9,000
2                              12,000                             9,000
3                              12,000                             9,000
4                              10,800     8,100
5                              10,800                              8,100
6                              5,400     8,100

9. Which of the following statements is true concerning projects Aand B?
a) Both NPV and IRR lead to the same investment decision.
b) Due to time disparity, IRR indicates that project A should beaccepted and NPV indicates that project B should be accepted.
c) Due to time disparity, IRR indicates that project B should beaccepted and NPV indicates that project A should be accepted.
d) Due to size disparity, IRR indicates that project A should beaccepted and NPV indicates that project B should be accepted.
e) Due to size disparity, IRR indicates that project B should beaccepted and NPV indicates that project A should be accepted.

10. Which of the following cash flows are not considered in thecalculation of the initial outlay for a capital investmentproposal?
a) increase in net working capital.
b) cost of issuing new bonds to finance the new project.
c) purchase price of asset
d) installation costs.
e) proceeds from selling an old asset which is being replaced by anew asset.

Answer & Explanation Solved by verified expert

3.8 Ratings (455 Votes)

9 aProject B has the higher NPV and also the higher IRR Henceproject B should be See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Consider the following cash flows for two mutually exclusivecapital investment projects. The required rate of return is 15%.Use thisYear Project ACash Flow Project BCash Flow0 -$40,000 -$30,0001 12,000 9,0002 12,000 9,0003 12,000 9,0004 10,800 8,1005 10,800 8,1006 5,400 8,1009. Which of the following statements is true concerning projects Aand B?a) Both NPV and IRR lead to the same investment decision.b) Due to time disparity, IRR indicates that project A should beaccepted and NPV indicates that project B should be accepted.c) Due to time disparity, IRR indicates that project B should beaccepted and NPV indicates that project A should be accepted.d) Due to size disparity, IRR indicates that project A should beaccepted and NPV indicates that project B should be accepted.e) Due to size disparity, IRR indicates that project B should beaccepted and NPV indicates that project A should be accepted.10. Which of the following cash flows are not considered in thecalculation of the initial outlay for a capital investmentproposal?a) increase in net working capital.b) cost of issuing new bonds to finance the new project.c) purchase price of assetd) installation costs.e) proceeds from selling an old asset which is being replaced by anew asset.