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

question 34

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 NPV decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c c } \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\text { Cash Flow } & - \$ 5,000 & \$ 1,200 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$ 1,100 & \$ 2,000\end{array}$$

• A) NPV = $1,766.55, accept the project
• B) NPV = $892.19, accept the project
• C) NPV = $1,288.94, accept the project
• D) NPV = ?$104.73, reject the project

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Definitions:

Marsupial

A class of mammals, primarily found in Australia and the Americas, characterized by giving birth to relatively undeveloped offspring that typically complete their development in a pouch.

Echinoderms

A phylum of marine animals including sea stars, sea urchins, and sand dollars, known for their radial symmetry and a water vascular system.

Chordates

Animals that at some stage of development have a notochord, a dorsal nerve cord, pharyngeal slits, an endostyle, and a post-anal tail, comprising all vertebrates and several closely related invertebrates.

Exoskeleton

A rigid external covering for the body in some invertebrate animals, especially arthropods, providing both support and protection.