Suppose Your Firm Is Considering Two Independent Projects with the Cash

question 113

Multiple Choice

Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively.
$$\begin{array}{l}\begin{array} {| l | l | l | l | l | }\hline\text {Time: }&0&1&2&3\\\hline\text {Project A Cash flow:}&-5,000&1,000&3,000&5,000\\\hline\text {Project b Cash flow:}&-10,000&5,000&5,000&5,000\\\hline\end{array}\end{array}$$
Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

• A) Accept both A and B
• B) Accept neither A nor B
• C) Accept A, reject B
• D) Reject A, accept B