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

question 100

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 discounted payback decision rule to evaluate this project; should it be accepted or rejected?

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

---

Definitions:

Omission Bias

The tendency to judge harmful actions as worse, or less moral, than equally harmful inactions (omissions).

Status Quo Bias

The tendency for individuals to prefer for things to stay the same by doing nothing or by sticking with a decision made previously.

Default Option

A pre-selected choice among a set of options that will be applied if no alternative is specified by the decision-maker.

Action

The act of doing something or taking steps towards achieving an outcome.