Suppose Your Firm Is Considering Investing in a Project with the Cash

question 10

Multiple Choice

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively.
$$\begin{array} { | l | c | c | c | c | c | c | } \hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \\\hline \text { Cash Flow } & - 125,000 & 65,000 & 78,000 & 105,000 & 105,000 & 25,000 \\\hline\end{array}$$
Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?

• A) 1.77 years, reject
• B) 1.94 years, accept
• C) 2.06 years, accept
• D) 3.00 years, reject

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Definitions:

Government Securities

Financial instruments issued by a government to raise funds from the public. These can include bonds, treasury bills, and other debt instruments with a promise to pay specified sums at future dates.

Open Market Operations

Monetary policy actions where central banks buy or sell government securities in the open market to control the money supply and interest rates.

Money Supply

The overall pool of economic resources in terms of money available at a particular time in an economy, including coins, paper money, and deposits in savings and checking accounts.

Fed

Short for the Federal Reserve, which is the central banking system of the United States, responsible for monetary policy.