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

question 17

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 discounted payback decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { l c c c c c c c c } \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 4 \\\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000\end{array}$$

• A)Discounted payback = 4.29 years; accept the project
• B)Discounted payback = 3.97 years; accept the project
• C)Discounted payback > 4.5 years; reject the project
• D)Discounted payback = 4.4 years; accept the project

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Definitions:

Problem Situation

A scenario in which the current state of affairs is unsatisfactory or presents challenges that require solutions.

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Measures taken to rectify a problem, error, or deviation from set standards or expectations.

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A specific, pre-determined standard or goal that an individual or organization aims to achieve.

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The method of studying phenomena by examining their development and evolution over time, often using historical records and trends.