The Thunderstruck Corporation paid $100000 for an asset. The asset is expected t

Question

The Thunderstruck Corporation paid $100000 for an asset. The asset is expected to generate end-of-year cash flows of $30000, $28000, $23000, $30000. and $30000 in years one through five, respectively. Calculate the payback period for the project, assuming all the cash flows from the project occur at the end of the year. A 3.7 Years B 1.7 Years C 4.7 Years D 2.7 Years Which of the following set of calculations must be erroneous If the required rate of return for all the projects is 10%? Project B Project C Project 0 Project A Which of the following set of calculations must be erroneous if the required rate of return is 12%? Project B Project D Project A Project C What evaluation technique attempts to compare your project's earnings to the earnings of other firms? accounting rate of return profitability index earnings multiples internal rate of return

Explanation / Answer

13. The payback period for the project will be calculated as under : Year Cash Cumulative Inflow Inflows 1 30000 30000 2 28000 58000 3 23000 81000 3 years 4 30000 111000 7.6 month 5 30000 141000 Thus, the payback period is 3 years 7 months or 3.7 years. 14. If the required rate of return for the Project is 10%, then Project C will be false since, at that level, if the IRR is 11%, the Profitability Index cannot be less than 1. 15. If the required rate of return is 12%, then Project B will be false since, at that level, the IRR is 13%, and hence the Profitability Index cannot be less than 1. 16. The Accounting Rate of return attempts to compare your company's earnings to the earnings of other firms.

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