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

question 35

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 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and three and a half years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c } \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000\end{array}$$

• A) Payback = 4.90 years, reject
• B) Payback = 4.40 years, reject
• C) Payback = 5.80 years, reject
• D) Payback > 6.00 years, reject

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Definitions:

Industrial Services

Services provided to other businesses in the industrial sector, including maintenance, repair, and operations support.

Accessory Equipment

Auxiliary devices or attachments that are not integral to the main system but enhance its functionality or usability.

Components

The parts or elements that make up a larger system, machine, or piece of equipment.

Final Business Product

The last product offered by a business to its customers, which may have undergone several stages of development or refinement.