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Table 14.6
Year
Costs
Benefits
0
$400
$ 0
1
0
50
2
0
50
3
0
400
-(Table 14.6) Suppose that the interest rate is 9% and the firm requires a payback period of three years. Which of the following statements is (are) TRUE?

Question

Quizplus · Accepted Answer

The payback period is 3 years, and the benefits start at year 1. Therefore, the project will pay back its initial investment in 3 years if it earns at least $400 in total benefits by year 3.

Using a discount rate of 9%, the present value of the benefits in year 3 is $400 ÷ (1 + 0.09)^3 = $302.11.

The total investment cost is $400, so the payback period is within 3 years if the total present value of benefits by year 3 is at least $400. This is true since the present value of the benefits is $302.11 after 3 years. Therefore, statement I is true.

Statements II and III are not relevant to determining whether the payback period requirement is met.

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