Which of the following statements is (are) correct? (x) If the cost of an investment is...

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Which of the following statements is (are) correct? (x) If thecost of an investment is $20,000 and the annual sales from theinvestment is 12.5 percent of the cost, then the payback period is8.0 years.
(y) It is always possible to determine a payback period when thecash inflows from the project are uneven as long as the cashinflows exceed the cost of the project.
(z) If the discounted payback period for a given project is longerthan the payback benchmark then the firm will not pursue theproject even though it may have a NPV greater than zero.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only
You are considering the purchase of an investment that would payyou $2,450 per year for Years 1, 2 and 3, $2,225 per year for Years4, 5, 6 and 7, and $1,850 per year for Years 8, 9 and 10. If yourequire a 11.25% rate of return, and the cash flows occur at theend of each year, then how much should you be willing to pay forthis investment?
A. more than $14,550
B. between $14,100 and $14,550
C. between $13,650 and $14,100
D. between $13,200 and $13,650
E. between $12,750 and $13,200
As a student of finance, you predict that the net present value(NPV) of a proposed new $12.5 million warehouse is $1 million. Youdetermined that the firm’s cost of capital is 8.75%. How shouldthese findings be interpreted?
A. More information such as the payback period should be evaluatedsince the reliance on only one capital budgeting technique shouldbe discouraged.
B. Although NPV is positive, its value is too low for such a largeexpenditure and as a result, the project should be rejected.
C. The project should be rejected because the NPV is less than the8.75% of the cost of the warehouse.
D. The project does not meet the acceptance criteria of the NPVmethod and should be rejected.
E. The project should be accepted because it will add value to thefirm.

Answer & Explanation Solved by verified expert

4.2 Ratings (839 Votes)

1. B. Only x and y (if revenue 12.5% of the cost, then payback period=1/12.5%=8. And even if cash flow is uneven, payback period can be determined, if NPV is zero then project can be accepted)

Below is the calculation of the present value for such cash flow:

Year	Cashflow	Present Value @11.25% (i.e. Cashflow/1.1125^year)
1	2,450.00	2,202.25
2	2,450.00	1,979.55
3	2,450.00	1,779.37
4	2,225.00	1,452.55
5	2,225.00	1,305.66
6	2,225.00	1,173.63
7	2,225.00	1,054.95
8	1,850.00	788.45
9	1,850.00	708.71
10	1,850.00	637.05
	Total	13,082.15

So, you need to invest $13082.15. Option E is correct.

3. E. The project should be accepted as the project will add value to the firm.

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Transcribed Image Text

Which of the following statements is (are) correct? (x) If thecost of an investment is $20,000 and the annual sales from theinvestment is 12.5 percent of the cost, then the payback period is8.0 years.(y) It is always possible to determine a payback period when thecash inflows from the project are uneven as long as the cashinflows exceed the cost of the project.(z) If the discounted payback period for a given project is longerthan the payback benchmark then the firm will not pursue theproject even though it may have a NPV greater than zero.A. (x), (y) and (z)B. (x) and (y) onlyC. (x) and (z) onlyD. (y) and (z) onlyE. (z) onlyYou are considering the purchase of an investment that would payyou $2,450 per year for Years 1, 2 and 3, $2,225 per year for Years4, 5, 6 and 7, and $1,850 per year for Years 8, 9 and 10. If yourequire a 11.25% rate of return, and the cash flows occur at theend of each year, then how much should you be willing to pay forthis investment?A. more than $14,550B. between $14,100 and $14,550C. between $13,650 and $14,100D. between $13,200 and $13,650E. between $12,750 and $13,200As a student of finance, you predict that the net present value(NPV) of a proposed new $12.5 million warehouse is $1 million. Youdetermined that the firm’s cost of capital is 8.75%. How shouldthese findings be interpreted?A. More information such as the payback period should be evaluatedsince the reliance on only one capital budgeting technique shouldbe discouraged.B. Although NPV is positive, its value is too low for such a largeexpenditure and as a result, the project should be rejected.C. The project should be rejected because the NPV is less than the8.75% of the cost of the warehouse.D. The project does not meet the acceptance criteria of the NPVmethod and should be rejected.E. The project should be accepted because it will add value to thefirm.