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

question 11

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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c c c } \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\text { Cash Flow } & - \$ 5,000 & \$ 1,300 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$ 1,100 & \$ 2,000\end{array}$$

• A) Payback = 4.44 years, reject
• B) Payback = 3.44 years, accept
• C) Payback = 3.54 years, reject
• D) Payback = 3.24 years, reject

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