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

question 14

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 a half and four and a half years, respectively. Use the discounted payback decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { | l | l | l | l | l | l | l | l | } \hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \begin{array} { l } \text { Cash } \\\text { Flow }\end{array} & - 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000 \\\hline\end{array}$$

• A)Discounted payback = 4.29 years; accept the project
• B)Discounted payback = 3.97 years; accept the project
• C)Discounted payback > 4.5 years; reject the project
• D)Discounted payback = 4.4 years; accept the project

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Definitions:

Production Costs

Expenses incurred in the process of creating a product or service, including labor, materials, and overheads.

Property Rights

Legal rights to use, control, and dispose of property, including real estate, intellectual property, and tangible goods.

Sustainable Rate

A rate of growth or extraction that can be maintained over time without depleting resources or causing environmental damage.

Individual Transferable Quotas (ITQs)

Limits (quotas) set by a government or a fisheries commission on the total number or total weight of a species that an individual fisher can harvest during some particular time period; fishers can sell (transfer) the right to use all or part of their respective individual quotas to other fishers.