Compute the Discounted Payback Statistic for Project Y and Recommend

question 88

Multiple Choice

Compute the discounted payback statistic for Project Y 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 12 percent and the maximum allowable discounted payback is three years. $$\begin{array} { | l | c | c | c | c | c | c | } \hline \text { Time: } & 0 & 1 & 2 & 3 & 4 & 5 \\\hline \text { Cash flow: } & - 5,000 & 500 & 2,000 & 3,000 & 1,500 & 500 \\\hline\end{array}$$

• A)3.45 years, reject
• B)3.86 years, reject
• C)3.45 years, accept
• D)3.86 years, accept

---

Definitions:

Real Wages

Wages or salaries adjusted for inflation, reflecting the true purchasing power of income.

Potential Output

The economy’s maximum sustainable output, given the supply of resources, technology, and rules of the game; the output level when there are no surprises about the price level.

Natural Rate

The natural rate refers to the long-term unemployment rate that an economy experiences under normal conditions, unaffected by short-term cyclical fluctuations.

Full-Employment

A scenario where an economy utilizes all accessible labor resources in the most optimized manner.