You are considering two projects with the following cash flows: Which of the following statements are true concerning these two projects?
I. Both projects have the same future value at the end of year 4, given a positive rate of return.
II. Both projects have the same future value given a zero rate of return.
III. Project X has a higher present value than Project Y, given a positive discount rate.
IV. Project Y has a higher present value than Project X, given a positive discount rate.

Question

You are considering two projects with the following cash flows:  Which of the following statements are true concerning these two projects?
I. Both projects have the same future value at the end of year 4, given a positive rate of return.
II. Both projects have the same future value given a zero rate of return.
III. Project X has a higher present value than Project Y, given a positive discount rate.
IV. Project Y has a higher present value than Project X, given a positive discount rate.

Quizplus · Accepted Answer

I. Both projects have the same cash flows in years 1-3, so they will have the same future value at the end of year 4, given a positive rate of return.
II. Both projects have the same cash flows in years 1-3, so they will have the same future value at the end of year 4, given a zero rate of return.
III. Project X has higher cash flows in years 1-3 and the same cash flow in year 4 as Project Y, so it will have a higher present value given a positive discount rate.
IV. Since Project Y has a higher cash flow in year 4 than Project X and the same cash flows in years 1-3, it will have a higher present value given a positive discount rate. However, this statement is not true because it is already covered by Statement III.

You Are Considering Two Projects with the Following Cash Flows