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

Recognize the effects of heuristics on human cognition and decision-making.

Identify the principles of behavioral economics, including prospect theory and the endowment effect.

Comprehend the role and influence of framing and anchoring effects in consumer behavior.

Grasp the significance of loss aversion and the subjective value of gains and losses.

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Definitions:

15 Years Old

Refers to an individual or object that has reached or exists for a duration of fifteen years.

Restrictive Indorsement

An endorsement on a negotiable instrument that limits the way the instrument can be used, such as by specifying a particular payee.

Fiduciary Duty

An obligation to act in the best interest of another party, for instance, the duty a trustee has towards the beneficiaries of the trust.

Indorsee

The person to whom a negotiable instrument (like a check or promissory note) is endorsed or transferred.