Project Black Swan Requires an Initial Investment of $115,000

question 88

Multiple Choice

Project Black Swan requires an initial investment of $115,000. It has positive cash flows of $140,000 for each of the next two years. Because of major demolition and environmental clean-up costs, cash flow for the third and final year of the project is $(170,000) . The company accepts all projects with a payback period of 2 years or less.

• A) The payback rule would reject this project because of its risks are too high.
• B) The payback rule would reject this project because all negative cash flows are added together.
• C) If strictly applied, the payback rule would reject this project.
• D) If strictly applied, the payback rule would accept this project.

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Definitions:

Expenses

Outflows or other uses of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations.

Assets

Resources owned or controlled by a business, considered to have economic value and expected to benefit future operations.

Prepaid Rent Expense

Prepaid rent expense is an advance payment for rent that is recorded as an asset on the balance sheet until it is used or consumed in future periods.

Liability

An obligation that a corporation or individual has to another entity, typically financial in nature, such as loans or accounts payable.