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 three and a half years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c }
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000
\end{array}$$
A) Payback = 4.90 years, reject
B) Payback = 4.40 years, reject
C) Payback = 5.80 years, reject
D) Payback 6.00 years, reject

Question

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 three and a half years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \
\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000
\end{array}$$
A) Payback = 4.90 years, reject
B) Payback = 4.40 years, reject
C) Payback = 5.80 years, reject
D) Payback > 6.00 years, reject

Quizplus · Accepted Answer

The payback period is 4.90 years, which is greater than the maximum allowable payback period of three years. Therefore, the project should be rejected.

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