Suppose your firm is considering two mutually exclusive, required projects with
ID: 2654450 • Letter: S
Question
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 10 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
Time: 0 1 2 3
Project A Cash Flow -32,000 22,000 42,000 13,000
Project B Cash Flow -42,000 22,000 8,000 62,000
Use the payback decision rule to evaluate these projects; which one(s) should it be accepted or rejected?
accept A, reject B
accept neither A nor B
reject A, accept B
accept both A and B
Explanation / Answer
Project A covers the initial investment of 32000 in the second year, which is under the maximum payback period of 2 years.
Project B covers the initial investment of 42000 in the third year, which is again under the maximum payback period of 3 years.
Both projects meet the criteria of being accepted. Hence accept both A and B.
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