A Project Has a Required Payback Period of Three Years

question 62

Multiple Choice

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? 

• A) The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. 
• B) The cash flow in Year 3 is ignored. 
• C) The project's cash flow in Year 3 is discounted by a factor of (1 + R)³.
• D) The cash flow in Year 2 is valued just as highly as the cash flow in Year 1. 
• E) The project is acceptable whenever the payback period exceeds three years. 

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Definitions:

Cost of Trade Credit

The cost associated with the terms of credit extended by suppliers, including discounts for early payment and penalties for late payment.

Paying Late

Paying late refers to the action of failing to meet the due date for a financial obligation, which can lead to late fees, interest charges, and negative impacts on credit scores.

Credit Terms

Statements of the credit period and any discounts offered—for example, 2/10, net 30.

Discount Period

The time interval between when a bill of exchange is issued and its payment date, during which the bill is sold at a discount from face value.