QUESTION 7 Which of the following statements are correct concerning the present

Question

QUESTION 7 Which of the following statements are correct concerning the present value break-even point of a project? I. The present value of the cash inflows equals the amount of the initial investment. 1l. The payback period of the project is equal to the life of the project. IlI. The operating cash flow is at a level that produces a net present value of zero. IV. The project never pays back on a discounted basis O a.I and Ill only O b. ll and IV only O c. I, lll, and IV only O d. IIl and IV only O e.I and Il only

Explanation / Answer

At present value break even point of a project, present value of cash inflows of the project becomes equal to present value of cash outflows.Hence, Net present value of the project becomes zero at the break even level. Hence the following two statements given in the question are correct:

(I) The present value of the cash inflows equals the amount of the initial investment.

(III) The operating cash flows is at a level that produces a net present value of zero.

Hence, the correct option is (a) i.e. (I) and (III) only.

The other two statements i.e. Statements (II) and (IV) are incorrect. The pay back period refers to the minimum time period in which original investment in the project is recovered. Hence, it is not necessary that the payback period is equal to life of the project.

Statement IV, ' The project never pays back on a discounted basis' is incorrect since a project may payback on a discounted basis.

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