Question

And explain why ?

14. Which one of the following statements is correct given the following two sets of project cash flows? Project A S6,000 Project B S2.000 Year 1 Year 2 3.000 Year 3 Year 4 2.500 3,000 2,500 3,000 A. The cash flows for Project B are an annuity, but those of Project A are not. B. Both sets of cash flows have equal present values as of time zero given a positive discount rate. C. The present value at time zero of the final cash flow for Project A will be discounted using an exponent of three. D. The present value of Project A cannot be computed because the second cash flow is equal to zero. E. As long as the discount rate is positive, Project B will always be worth less today than will Project A.

Answer 1

14. Which one of the following statements is correct given the following two sets of project cash flows?
	Project A	Project B
Year 1	6000	2000
Year 2	0	3000
Year 3	2500	3000
Year 4	2500	3000
A. The cash flows for Project B are an annuity, but those of Project A are not.	Incorrect	The cash flows for Project B are not an annuity, If it was an  annuity cash flow would be equal   in each and every period.
B. Both sets of cash flows have equal present values as of time zero given a positive discount rate.	Incorrect	Information about cash flow at time zero is not given so we can't reach on any conclusion.
C. The present value at time zero of the final cash flow for Project A will be discounted using an exponent of three.	Incorrect	The present value at time zero of the final cash flow for Project A will be discounted using an exponent of zero
D. The present value of Project A cannot be computed because the second cash flow is equal to zero.	Incorrect	It can be computed.
E. As long as the discount rate is positive, Project B will always be worth less today than will Project A.	Correct	A dollar today is worth more than a dollar tomorrow, Project A has greater cash flows in the initial year so its present value will be more
Assuming Discount rate be 10%
Year	Project A	Project B	PV @ 10%	Present value Project A	Present value Project B
1	6000	2000	0.9091	$  5,454.55	$  1,818.18
2	0	3000	0.8264	$            -	$  2,479.34
3	2500	3000	0.7513	$  1,878.29	$  2,253.94
4	2500	3000	0.6830	$  1,707.53	$  2,049.04
			Total	$  9,040.37	$  8,600.51
Assuming Discount rate be 15%
Year	Project A	Project B	PV @ 15%	Present value Project A	Present value Project B
1	6000	2000	0.8696	$  5,217.39	$  1,739.13
2	0	3000	0.8264	$            -	$  2,479.34
3	2500	3000	0.7513	$  1,878.29	$  2,253.94
4	2500	3000	0.6830	$  1,707.53	$  2,049.04
			Total	$  8,803.21	$  8,521.45