Compute the Payback Statistic for Project X and Recommend Whether

question 50

Multiple Choice

Compute the payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 9 percent and the maximum allowable payback is four years. $$\begin{array} { | l | c | c | c | c | c | c | } \hline \text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \\\hline \text { Cash flow: } & - 1,000 & - 75 & 100 & 100 & 0 & 2,000 \\\hline\end{array}$$

• A)3.4375 years, accept
• B)3.78 years, reject
• C)4.4375 years, reject
• D)4.78 years, accept

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Definitions:

Par Value

The nominal or face value of a stock or bond, as stated by the issuing company.

Dividends

The allocation of a corporation's earnings to its shareholders, in the form of monetary distributions.

Retained Earnings

The portion of a company's profits that are kept or retained within the company to reinvest in the business or pay down debt, rather than distributed to shareholders as dividends.

Tax Liability

The total amount of tax owed to the tax authorities by an individual, organization, or corporation in a given period.