Asked by Parker Murdie on Jul 24, 2024
Verified
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.: 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. If "R" equals $42,000, the payback period equals the life of the project.
Which statement(s) is (are) true?
A) Only II and III.
B) Only I and III.
C) I, II, and III.
D) Only I and II.
Discount Rate
In finance, it is the interest rate used to determine the present value of future cash flows. In monetary policy, it's the rate at which commercial banks borrow from the central bank.
Salvage Value
This is the estimated residual value of an asset at the end of its useful life.
Net Operating Cash Flows
Refers to the cash generated from a company's core business operations, excluding cash flows related to financing and investing activities.
- Cultivate an understanding and the practical use of the net present value (NPV) concept in the realm of investment decisions.
Verified Answer
CW
Corey WilsonJul 30, 2024
Final Answer :
B
Explanation :
The payback period is the time it takes for the cash inflows to cover the initial investment. If "R" is less than $42,000, the total cash inflows over five years would be less than $210,000, making statement I true as the payback period would indeed exceed the life of the project. If "R" equals $42,000, the total cash inflows over five years would exactly equal $210,000, making statement III true as the payback period would exactly equal the life of the project. Statement II is incorrect because if "R" is greater than $42,000, the total cash inflows over five years would exceed $210,000, meaning the payback period would be less than the life of the project, not exceed it.
Learning Objectives
- Cultivate an understanding and the practical use of the net present value (NPV) concept in the realm of investment decisions.