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

question 10

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 statistics for the project are three and a half four and a half years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { | l | l | l | l | l | l | l | l | } \hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \begin{array} { l } \text { Cash } \\\text { Flow }\end{array} & - \$ 5,000 & \$ 1,300 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$ 1,100 & \$ 2,000 \\\hline\end{array}$$

• A)Payback = 4.44 years; reject
• B)Payback = 3.44 years; accept
• C)Payback = 3.54 years; reject
• D)Payback = 3.24 years; reject

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Definitions:

Embryonic Stage

A critical phase in development that occurs from the second to the eighth week after fertilization during which major organs and structures within the body begin to form.

Major Organs

Essential organs within an organism that perform critical functions necessary for life, such as the heart, brain, lungs, liver, and kidneys.

Age Of Viability

The stage of fetal development at which the fetus has the capability to survive outside the uterus with medical support, typically around 24 weeks of gestation.

Prematurely

Occurring or done before the usual or proper time; too early.