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

question 122

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 a half and four and a half years, respectively. Use the NPV 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) NPV = $1,766.55, accept the project
• B) NPV = ?$892.19, reject the project
• C) NPV = $1,288.94, accept the project
• D) NPV = ?$3,577.90, reject the project

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Definitions:

Capital Contributions

Funds or assets provided by owners or investors to increase a company's capital.

Capital Account

An account on a nation's balance of payments that records transactions involving the acquisition or disposal of assets.

Net Income

The total profit of a company after all expenses, including taxes and operating costs, have been subtracted from total revenue.