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

question 114

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 PI 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) PI = 6.94 percent, reject the project
• B) PI = 7.52 percent, reject the project
• C) PI = 23.61 percent, accept the project
• D) PI = 35.33 percent, accept the project

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Definitions:

Financial Indicator

Quantitative measures used to assess the financial health, performance, and stability of a business or investment.

Same-Store Sales Growth

Refers to the revenue increase from a retailer's existing outlets over a given period, eliminating effects from new store openings.

Sales Per Square Foot

A retail metric that measures the efficiency of a retail space by dividing total sales by the total floor area of retail space.

Retail Life Cycle

The process of growth and decline that retail outlets, like products, experience, consisting of the early growth, accelerated development, maturity, and decline stages.