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

question 90

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 three and a half years, respectively. Use the 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)Payback = 4.90 years; reject
• B)Payback = 4.40 years; reject
• C)Payback = 5.80 years; reject
• D)Payback > 6.00 years; reject

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Definitions:

Image Replacement Document

A document that substitutes for the original through the use of photographs or scanned copies, often used when the original is lost or inaccessible.

Substitute Check

A paper reproduction of both sides of an original check that can be processed electronically.

Obligated To Pay

Having a legal or moral responsibility to make a payment or settle a debt.

Float Time

The period between when a check is deposited in a bank account and when the amount is credited, reflecting processing time.