Question

Two alternative projects are under consideration: Project A Project B Revenues: $360,000 - 280,000 Variable costs: 210,000 - 180,000 Fixed costs: 90,000 - 90,000 Which of the following is (are) relevant in choosing between the projects?a. Revenues.
b. Variable costs.
c. Fixed costs.
d. Both a and b.

Answer 1

Answer:

D) Both a and b.

• a. Revenues.
• b. Variable costs.

Explanation:

                                         Project A                    Project B

Revenues:                        $360,000                  $280,000

Variable costs:                 $210,000                    $180,000

Fixed costs:                       $90,000                     $90,000

When you are choosing a project, all the information the information is relevant since you must determine the cash flows. In this case, since both projects have the same fixed costs, then they are not as important when determining which project is more profitable.

We are not told how much does depreciation represent from the fixed costs, but cash flows are calculated by:

net cash flow = [(revenues - variable costs - fixed costs) x (1 - tax rate)] + depreciation