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) I and II only.
B) I and III only.
C) II and III only.
D) I, II, and III.

Question

Quizplus · Accepted Answer

The payback period is the time required to recover the initial investment. In this case, the initial investment is $210,000.

To calculate the payback period, we need to determine the year in which the cumulative cash inflows equal or exceed the initial investment of $210,000.

Let's use the formula: Payback period = Initial Investment / Annual cash inflow

I. If R is less than $42,000, then the payback period would be greater than five years. For example, if R is $40,000 per year, the payback period would be $210,000 / $40,000 = 5.25 years. This statement is true.

II. If R is greater than $42,000, then the payback period would be less than five years. For example, if R is $50,000 per year, the payback period would be $210,000 / $50,000 = 4.2 years. This statement is false.

III. If R equals $42,000, then the payback period would be exactly five years, which is the life of the project. This statement is true.

Therefore, the correct answer is B (I and III only).

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