You are considering an investment with the following cash flows. Your required return is 8%, you...

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You are considering an investment with the following cash flows.Your required return is 8%, you require a payback of 3 years and adiscounted payback of 4 years. If your objective is to maximizeyour wealth, should you take this investment?
Year 0 1 2 3 4 5
Cash Flow –$50,000 $20,000 $20,000 $20,000 $20,000 –$50,000
Yes, because the payback is 2.5 years.
Yes, because the discounted payback is less than 4 years.
Yes, because both the payback and the discounted payback areless than 2 years.
No, because the NPV is negative.
No, because the project cash flows are not conventional.

Answer & Explanation Solved by verified expert

3.7 Ratings (329 Votes)

	No, because the NPV is negative refer table below
Discount rate	8.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
(50,000.000)	0	(50,000.00)	(50,000.00)
20,000.000	1	18,518.52	(31,481.48)
20,000.000	2	17,146.78	(14,334.705)
20,000.000	3	15,876.64	1,541.940
20,000.000	4	14,700.60	16,242.54
(50,000.000)	5	(34,029.16)	(17,786.62)

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Transcribed Image Text

You are considering an investment with the following cash flows.Your required return is 8%, you require a payback of 3 years and adiscounted payback of 4 years. If your objective is to maximizeyour wealth, should you take this investment?Year 0 1 2 3 4 5Cash Flow –$50,000 $20,000 $20,000 $20,000 $20,000 –$50,000Yes, because the payback is 2.5 years.Yes, because the discounted payback is less than 4 years.Yes, because both the payback and the discounted payback areless than 2 years.No, because the NPV is negative.No, because the project cash flows are not conventional.

		Yes, because the payback is 2.5 years.
		Yes, because the discounted payback is less than 4 years.
		Yes, because both the payback and the discounted payback areless than 2 years.
		No, because the NPV is negative.
		No, because the project cash flows are not conventional.