Ilona is considering two projects both of which have an initial cost of $17,000 and total cash inflows of $21,000. The cash inflows of project A are $6,000, $5,000, $5,000, and $5,000 over the next four years, respectively. The cash inflows for project B are $9,000, $7,000, $3,000 and $2,000 over the next four years, respectively. Which one of the following statements is correct if Ilona requires a 12 % rate of return and has a required discounted payback period of 3.5 years?
A) Both projects should be accepted.
B) Neither project ever pays back.
C) Project A should be accepted and Project B should be rejected.
D) Project A should be rejected and Project B should be accepted.
E) Both projects should be rejected even though Project B does pay back.

Question

Quizplus · Accepted Answer

The discounted payback period for both projects exceeds 3.5 years, but Project B does pay back within its lifetime. However, since neither meets the required discounted payback period, both should be rejected.

Ilona Is Considering Two Projects Both of Which Have an Initial