A Company Is Evaluating Three Possible Investments What Is the Payback Period for Project A? (Assume That

question 28

Multiple Choice

A company is evaluating three possible investments.The following information is provided by the company.
$\begin{array}{|l|l|l|l|} \hline & \text { Project A } & \text { Project B } & \text { Project C } \\\hline \text { Investment } & \$ 214,000 & \$ 54,000 & \$ 214,000 \\\hline \text { Salvage value } &0 & 22,000 & 24,000 \\\hline \text { Net cash flows: } & & & \\\hline \text { Year } 1 & 58,000 & 26,000 & 84,000 \\\hline \text { Year } 2 & 58,000 & 17,000 & 54,000 \\\hline \text { Year } 3 & 58,000 & 13,000 & 64,000 \\\hline \text { Year } 4 & 58,000 & 10,000 & 24,000 \\\hline \text { Year } 5 & 58,000 & 0& 0 \\\hline\end{array}$
What is the payback period for Project A? (Assume that the company uses the straight-line depreciation method.)

• A) 2.7 years
• B) 5.0 years
• C) 3.7 years
• D) 2.1 years

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Definitions:

Mead

A fermented beverage made from honey, water, and sometimes various fruits, spices, grains, or hops.

Utility Function

A mathematical representation in economics that shows the relationship between the total utility derived from consuming a good or service and its quantity.

Compensating Variation

An economic measure of the amount of money an individual would need to reach their initial level of utility after a change in prices, policy, or economic condition.

Fractional Numbers

Numbers that represent a part of a whole, typically written with a numerator and a denominator, such as 1/2 or 3/4.