A Project Manager Is Using the Payback Method to Make

question 22

Multiple Choice

A project manager is using the payback method to make the final decision on which project to undertake.The company has a 10% required rate of return and expects a 4% rate of inflation for the following four years.What is the non-discounted payback of a project that has cash flows as shown in the table? $$\begin{array} { | l | l | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 250,000 \\\hline 1 & \$ 50,000 \\\hline 2 & \$ 60,000 \\\hline 3 & \$ 70,000 \\\hline 4 & \$ 80,000 \\\hline\end{array}$$

• A) 3.875 years
• B) 3.625 years
• C) 3.750 years
• D) 3.500 years

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Definitions:

Par Value Stock

A legal face value assigned to a share of stock as specified in the corporate charter, which bears no relationship to its market value.

No-par Value Stock

Stock issued without a specified face value, leaving the issued price to be determined by the company's board of directors.

Preferred Stock

A class of ownership in a corporation that has a higher claim on assets and earnings than common stock, typically with fixed dividends.

Common Stock

Common Stock represents shares in a company that entitle the holder to vote at shareholders' meetings and to receive a part of the company's profits as dividends.