Chestnut Tree Farms has identified the following two mutually exclusive projects: $$\begin{array} { | r | r | r | }
\hline \text { Year } & \text { Cash Flow } & \underline { \text { Cash } } \
&{ ( \mathrm { A } ) } & \underline { \text { Flow } ( \mathrm { B } ) } \
\hline 0 & - \$ 40,000 & - \$ 40,000 \
\hline 1 & 11,300 & 17,400 \
\hline 2 & 14,800 & 14,100 \
\hline 3 & 13,700 & 12,900 \
\hline 4 & 7,900 & 2,200 \
\hline
\end{array}$$ Over what range of discount rates would you choose Project A?
A)7.13 percent or less
B)7.13 percent or more
C)6.38 percent or more
D)6.38 percent or less
E)6.57 percent or more

Question

Chestnut Tree Farms has identified the following two mutually exclusive projects: $$\begin{array} { | r | r | r | } 
\hline \text { Year } & \text { Cash Flow }  & \underline { \text { Cash } } \
&{ ( \mathrm { A } ) }  & \underline { \text { Flow } ( \mathrm { B } ) } \
\hline 0 & - \$ 40,000 & - \$ 40,000 \
\hline 1 & 11,300 & 17,400 \
\hline 2 & 14,800 & 14,100 \
\hline 3 & 13,700 & 12,900 \
\hline 4 & 7,900 & 2,200 \
\hline
\end{array}$$ Over what range of discount rates would you choose Project A?
A)7.13 percent or less
B)7.13 percent or more
C)6.38 percent or more
D)6.38 percent or less
E)6.57 percent or more

Quizplus · Accepted Answer

To determine the range of discount rates, we need to find the internal rate of return (IRR) for each project. If the IRR is greater than the required rate of return (discount rate), choose that project. If the IRR is less than the required rate of return, choose the other project.

For Project A:

IRR = 7.13%

For Project B:

IRR = 6.38%

Since Project A has a higher IRR than Project B, the range of discount rates for choosing Project A is any rate less than 7.13%. At discount rates greater than 7.13%, Project B would be the better choice. Therefore, the answer is D.

Chestnut Tree Farms Has Identified the Following Two Mutually Exclusive