An investment project that requires a present investment of $210,000 will have c

Question

An investment project that requires a present investment of $210,000 will have cash inflows of "R" dollars each year for the next five years. The project will terminate in five years. Consider the following statements (ignore income tax considerations):
I. If "R" is less than $42,000, the payback period exceeds the life of the project.
II. If "R" is greater than $42,000, the payback period exceeds the life of the project.
III. If "R" equals $42,000, the payback period equals the life of the project.
Which statement(s) is (are) true?

Explanation / Answer

210,000/5 = 42,000 If R = 42,000, the payback period equals the life of the project. If R>42,000, the payback period is less than the life of the project. If R is less than 42,000 the payback period exceeds the life of the project. Therefore, both I and III are true.

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