#1 Suppose you calculate the ordinary payback for a project, given the project c

Question

#1

Suppose you calculate the ordinary payback for a project, given the project cash flows and a required rate of return of 12%. After you calculate the ordinary payback, you discover that the actual required rate of return is 14%. The new payback you calculate using a required rate of return of 14% would be

a. lower than the payback calculated with a required rate of return of 12%.

b. higher than the payback calculated with a required rate of return of 12%.

c. the same as the payback calculated with a required rate of return of 12%.

d. uncertain because it could be either lower or higher than the payback calculated with a required rate of return of 12%

a. lower than the payback calculated with a required rate of return of 12%.

b. higher than the payback calculated with a required rate of return of 12%.

c. the same as the payback calculated with a required rate of return of 12%.

d. uncertain because it could be either lower or higher than the payback calculated with a required rate of return of 12%

Explanation / Answer

The answer is,

The new pay back period calculated using the required rate of return of 14% is lower than the payback calculated with a required rate of return of 12%.

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