Use the following mutually exclusive investment cash ﬂows for the question(s) below: Based on the payback criterion, which of the following is NOT true?
A) With a payback cutoff of 2.5 years, both projects are acceptable.
B) With a payback cutoff of three years, both projects are acceptable.
C) With a payback cutoff of 1.5 years, neither project is acceptable.
D) With a payback cutoff of 1.75 years, only Project A is acceptable.
E) If you choose the project that pays back the fastest, Project A is preferred.

Question

Use the following mutually exclusive investment cash ﬂows for the question(s) below:  Based on the payback criterion, which of the following is NOT true?
A) With a payback cutoff of 2.5 years, both projects are acceptable. 
B) With a payback cutoff of three years, both projects are acceptable. 
C) With a payback cutoff of 1.5 years, neither project is acceptable. 
D) With a payback cutoff of 1.75 years, only Project A is acceptable. 
E) If you choose the project that pays back the fastest, Project A is preferred.

Quizplus · Accepted Answer

With a payback cutoff of 1.75 years, only Project A is acceptable. Project B has a payback period of 2 years, which is longer than the cutoff. Option A and B are incorrect as both projects are acceptable with their respective payback cutoffs. Option C is also incorrect as that cutoff is too low for either project to be acceptable. Option E is not relevant to the payback criterion as it only considers the time it takes to recoup the initial investment, not the overall profitability or risk of the project.

Use the Following Mutually Exclusive Investment Cash ﬂOws for the Question(s)