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

question 43

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 PI decision to evaluate this project; should it be accepted or rejected?

• A)PI = 6.94 percent; reject the project
• B)PI = -7.52 percent; reject the project
• C)PI = -4.21 percent; reject the project
• D)PI = 5.33 percent; accept the project

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Definitions:

Retained Earnings

The portion of net income not distributed to shareholders but reserved by the company to reinvest in its core business or to pay debt.

Du Pont Identity

A financial analysis framework that breaks down Return on Equity (ROE) into three component parts—profit margin, asset turnover, and financial leverage—providing insights into a company's operational efficiency.

ROE

Return on Equity, an indicator of financial efficiency determined by dividing the net income by the equity of shareholders.