Question

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

a. profitability index
b. internal rate of return
c. payback
d. net present value
e. accounting rate of return

Answer 1

Answer:

d. net present value

Explanation:

Net present value is the present value of after tax cash flows from an investment less the amount invested.

The NPV gives the value of how much present value of the cash flows from the money invested exceeds the amount invested in the project.

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested. The IRR is unreliable because there is the problem of multiple IRR and it is also affected by the timing of cash flows. A project might be more profitable than the other but would rank below a project whose cash flows occur earlier

The Payback period calculates the amount of the time it takes to recover the amount invested in a project from its cumulative cash flows. The Payback period ignores the cash flows after the money invested has been recovered.

I hope my answer helps you