Evaluate the Following Projects Using the Payback Method Assuming a Rule

question 63

Multiple Choice

Evaluate the following projects using the payback method assuming a rule of 3 years for payback.

• A) Project A can be accepted because the payback period is 2.5 years but Project B cannot be accepted because it's payback period is longer than 3 years.
• B) Project B should be accepted because even though the payback period is 2.5 years for Project A and 3.001 for project B, there is a $1,000,000 payoff in the 4th year in Project B.
• C) Project B should be accepted because you get more money paid back in the long run.
• D) Both projects can be accepted because the payback is less than 3 years.

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Definitions:

Full Employment GDP

The maximum level of production an economy can sustain while keeping unemployment at its natural or non-accelerating inflation rate of unemployment (NAIRU).

Multiplier

In economics, a factor by which a change in spending results in an amplified change in national income and output.

Inflationary Gap

The difference between the actual output of an economy and the output it would produce without inflation, indicating an overheated economy.

Recessionary Gap

A situation where the real GDP is lower than the potential GDP at full employment, indicating underutilized resources.