Sorenson Motors (SM) is considering a project that has the following cash flows:

ID: 2629288 • Letter: S

Question

Year Cash Flow

0 Initial Outlay

1 $2,000

2 3,000

3 3,000

4 1,500

The project has a payback period of 2.5 years. The weighted average cost of capital is 12%. Which of the following statements is NOT correct?

A)The project is generating more cash than is needed to service its debt, and this excess cash accrues solely to SMs stockholders.

B) If SM were to accept this project, its shareholders wealth would increase by $765.91. C)

C) The project is expected to generate $1.12 for each $1.00 of investment.

D) Acceptance of this project would increase SMs value by $7,265.91.

3)3,000
C) The project is expected to generate $1.12 for each $1.00 of investment.

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