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

question 54

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 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively. $$\begin{array} { l l l l l l l } \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \\\text { Cash Flow } & - 125,000 & 65,000 & 78,000 & 105,000 & 105,000 & 25,000\end{array}$$ Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

• A)$9,704.31, reject
• B)$84,140.71, accept
• C)$134,704.31, accept
• D)$150,868.83, accept

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Definitions:

Interest Payments

Payments made periodically, often annually or semi-annually, as compensation for borrowing money, calculated as a percentage of the total amount borrowed.

Bond Price

The market price for which a bond is bought or sold, influenced by interest rates, credit quality, and maturity.

Interest-Bearing Note

A debt instrument that pays interest to the holder at a fixed or variable rate until its maturity.

Bond

A fixed-income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period at a variable or fixed interest rate.