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

question 64

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 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively. $$\begin{array} { | l | c | c | c | c | c | c | } \hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \\\hline \text { Cash Flow } & - 100,000 & 30,000 & 45,000 & 55,000 & 30,000 & 10,000 \\\hline\end{array}$$

• A)1.23 years, Accept
• B)2.45 years, accept
• C)2.77 years, accept
• D)5.36 years, reject

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Definitions:

Zero Economic Profit

A condition in which a firm's total revenue equals its total costs, implying normal profit but no excess profit over what is considered normal in the industry.

Long Run

A period in economics where all factors of production and costs are variable, and firms can adjust all inputs as needed.

Marginal Revenue

The additional income that is generated by selling one more unit of a product or service.

Market Price

The current price at which a good or service can be bought or sold in a marketplace.