A Company Utilizes the Payback Method Exclusively to Select Projects

question 31

Multiple Choice

A company utilizes the payback method exclusively to select projects.Which of the following mutually exclusive (they can only do one of them) projects will they choose? (Assume cash flows occur in equal monthly installments)

• A) Initial Investment: $10,000 Net Cash Flows: year 1:$0 year 2:$120,000 year 3:$60,000 each year thereafter:$60,000
• B) Initial Investment:$100,000 Net Cash Flows: year 1:$50,000 year 2:$50,000 year 3:$100,000 each year thereafter:$1,000,000
• C) Initial Investment:$10,000 Net Cash Flows: year 1:0 year 2:$100,000 year 3:$100,000 each year thereafter:$100,000
• D) Initial Investment:$100,000 Net Cash Flows: year 1:$1,000,000 year 2:$2,000,000 year 3:$2,000,000 each year thereafter:0
• E) Initial Investment:$10,000 Net Cash Flows: year 1:$8,000 year 2:$12,000 year 3:$120,000 each year thereafter:$120,000

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Definitions:

Contribution Margin

The amount remaining from sales revenue after variable costs have been deducted, indicating how much contributes to covering fixed costs and generating profit.

Variable Expense Ratio

A financial metric that measures variable costs as a percentage of sales, reflecting how those costs fluctuate with production output.

Operating Leverage

A measure of how sensitive a company's operating income is to a change in sales volume, indicating the level of fixed costs in the business structure.

Sales Commissions

Payments made to sales personnel based on sales volume or value, serving as an incentive for increased sales performance.