Elderkin& Martin is considering an investment which will cost $259,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $58,000. This inflow will increase to $150,000 and then $200,000 for the following two years before ceasing permanently. The firm requires a 14 % rate of return and has a required discounted payback period of three years. The firm should _____ the project because the discounted payback period is _____ years. Accept or reject this project? Why?
A) accept; 2.26
B) accept; 2.49
C) accept; 3.96
D) reject; 3.26
E) reject; 3.96

Question

Quizplus · Accepted Answer

The discounted payback period is 3.96 years, which exceeds the firm's required discounted payback period of three years, so the firm should reject the project.

Elderkin& Martin Is Considering an Investment Which Will Cost $259,000