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

question 74

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. $$\begin{array} { l l l l l l l } \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \\\text { Cash Flow } & - 100,000 & 30,000 & 45,000 & 55,000 & 30,000 & 10,000\end{array}$$ Use the PI decision rule to evaluate this project; should it be accepted or rejected?

• A)-0.39 percent, reject
• B)0.39 percent, accept
• C)-38.88 percent, reject
• D)38.88 percent, accept

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Definitions:

Depreciated

The reduction in value of an asset over time due to wear and tear, age, or obsolescence, commonly used in accounting to allocate the cost of an asset over its useful life.

IFRS

International Financial Reporting Standards, a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements.

Market Value

The ongoing value at which one can buy or sell a service or asset in the market.

Nonmonetary Assets

Assets that cannot be readily converted into cash, such as property, equipment, and patents.