Time Cash flow 0 -165,000 1 56,500 2 67,400 3 45,600 4 29,800 5 7,500 Suppose your firm...

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Finance

Time    Cash flow
0    -165,000
1 56,500
2    67,400
3    45,600
4 29,800
5 7,500
Suppose your firm is considering investing in Project K with thecash flows shown in the table. Assume that the required rate ofreturn on projects of this risk class is 7.5 percent, and that themaximum allowable payback and discounted payback statistics for theproject are 3.0 and 3.6 years, respectively. Which of the followingstatements is (are) correct?
(x) If you use the payback decision rule to evaluate thisproject then you accept the project since the payback period is 2.9years.
(y) If you use the discounted payback decision rule to evaluatethis project then you reject the project since the discountedpayback period is 3.8 years. (z) The NPV of this project is morethan $10,000. If you use the NPV decision rule to evaluate thisproject; then it should be accepted.

Answer & Explanation Solved by verified expert

3.5 Ratings (559 Votes)

x First of all lets calculate payback period Year Cash Flows Cumulative Cash Flows Cumulative cash flows calculation 0 165000 165000 Year 0 cash flows 1 56500 108500 Year 0 cash flows Year 1 cash flows 2 67400 41100 Year 0 cash flows Year 1 cash flows Year 2 cash flows 3 45600 4500 Year 0 cash flows Year 1 cash flows Year 2 cash flows Year 3 cash flows Since in the year between 2 and 3 we get a cumulative cash flow equal to 0 it means that the payback period is in between 2nd and 3rd See Answer

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Transcribed Image Text

Time Cash flow0 -165,0001 56,5002 67,4003 45,6004 29,8005 7,500Suppose your firm is considering investing in Project K with thecash flows shown in the table. Assume that the required rate ofreturn on projects of this risk class is 7.5 percent, and that themaximum allowable payback and discounted payback statistics for theproject are 3.0 and 3.6 years, respectively. Which of the followingstatements is (are) correct?(x) If you use the payback decision rule to evaluate thisproject then you accept the project since the payback period is 2.9years.(y) If you use the discounted payback decision rule to evaluatethis project then you reject the project since the discountedpayback period is 3.8 years. (z) The NPV of this project is morethan $10,000. If you use the NPV decision rule to evaluate thisproject; then it should be accepted.