Suppose your firm is considering two mutually exclusive, required projects with
ID: 2765863 • Letter: S
Question
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?
reject A, accept B
accept neither A nor B
accept both A and B
accept A, reject B
Time: 0 1 2 3 Project A Cash Flow -39,000 29,000 49,000 20,000 Project B Cash Flow -49,000 29,000 1,000 69,000Explanation / Answer
PBP Project A Time Amount Cumulative - (39,000.00) (39,000.00) 1.00 29,000.00 (10,000.00) 2.00 49,000.00 39,000.00 3.00 20,000.00 59,000.00 PBP= 1 + 10,000/49,000 PBP= 1.20 Years PBP Project B Time Amount Cumulative - (49,000.00) (49,000.00) 1.00 29,000.00 (20,000.00) 2.00 1,000.00 (19,000.00) 3.00 69,000.00 50,000.00 PBP= 2 + 19,000 / 69,000 PBP= 2.28 Years Since allowable PBP is 2 Years therefore Project A should be accepted accept A, reject B
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