An investment project that requires a present investment of $210,000 will have cash inflows of "R" dollars each year for the next five years.The project will terminate in five years.Consider the following statements (ignore income tax considerations): I)If "R" is less than $42,000,the payback period exceeds the life of the project.
II)If "R" is greater than $42,000,the payback period exceeds the life of the project.
III)If "R" equals $42,000,the payback period equals the life of the project.
Which statement(s)is (are)true?
A) Only I and II.
B) Only I and III.
C) Only II and III.
D) I,II,and III.

Question

Quizplus · Accepted Answer

The payback period is the time taken to recover the initial investment. We can use the formula payback period = Initial investment / Annual cash inflow. Substituting the given values, we get the payback period = 210,000 / R. I) If R < 42,000, then payback period > 5 years (life of the project). So, statement I is true. II) If R > 42,000, then payback period < 5 years (life of the project). So, statement II is false. III) If R = 42,000, then payback period = 5 years (life of the project). So, statement III is true. Hence, only statements I and III are true, and the answer is B.

An Investment Project That Requires a Present Investment of $210,000