50 Management has set standards for new projects that dictate the required rate

Question

50 Management has set standards for new projects that dictate the required rate of return be 17% and the payback cutoff be 3 years. Match each piece of data for a potential capital project with what the company should recommend based on that piece of data and on the standard decision crite Answer options may be used more than once or not at all. Select your answers from the pull down list Profitability index is 42 Internal rate of return is 13% Payback period is 372 years Net present value is $19,000 Accept the capital project Reject the capital project NEXT BOOKMARK CLEAR

Explanation / Answer

Profitability index = PV of future cashflows / Initial investment and it should be greater than one to accept the project. In this case it is lower than one, so we'd reject the project.

Internal rate of return should be atleast higher than the required rate of return/ discount rate in order make a profit from the project, in our case IRR 13% < 17% Discount rate, hence we'd reject the project.

Payback period as mentioned should be max 3 Years, that means that the project should atleast return the invested capital in 3 years, but for this project the payback period is 3.72 years, so we'd reject this project.

The NPV of a project should be positive in order to accept the project, in this case the NPV is 19,000$ , so we'd accept the project.

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