Coffer Co Is Analyzing Two Projects for the Future If the Company Is Using the Payback Period Method and That

question 109

Multiple Choice

Coffer Co. is analyzing two projects for the future. Assume that only one project can be selected. $$\begin{array} { | l | c | r | } \hline & \text { Project X } & \text { Project Y } \\\hline \text { Cost of machine } & \$ 77,000 & \$ 55,000 \\\hline \text { Net cash flow: } & & \\\hline \text { Year 1 } & 28,000 & 2,000 \\\hline \text { Year 2 } & 28,000 & 25,000 \\\hline \text { Year 3 } & 28,000 & 25,000 \\\hline \text { Year 4 } & 0 & 20,000 \\\hline\end{array}$$ If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?

• A) Project Y.
• B) Project X.
• C) Both X and Y are acceptable projects.
• D) Neither X nor Y is an acceptable project.
• E) Project Y because it has a lower initial investment.

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Definitions:

Callable Bond

A type of bond that gives the issuer the right to repay the bond before its maturity date, usually at a specified call price.

Redeem

The act of exchanging something, such as a coupon or financial securities, for a specific value or service.

Maturity Date

is the specified date on which the final payment of a loan, bond, or other financial instrument is due to be paid.

Face Value

The nominal or dollar value printed on a financial instrument, such as a bond or stock certificate.