You are considering an investment with the following cash ﬂows. Your required return is 10%, you require a payback of three years and a discounted payback of four years. If your objective is to
Maximize your wealth, should you take this investment?
A) Yes, because the payback is 2.5 years.
B) Yes, because the discounted payback is four years.
C) Yes, because both the payback and the discounted payback are less than two years.
D) No, because the NPV is negative.
E) No, because the project has a large negative cash ﬂow at the end of its life.

Question

You are considering an investment with the following cash ﬂows. Your required return is 10%, you require a payback of three years and a discounted payback of four years. If your objective is to
Maximize your wealth, should you take this investment? 
A) Yes, because the payback is 2.5 years. 
B) Yes, because the discounted payback is four years. 
C) Yes, because both the payback and the discounted payback are less than two years. 
D) No, because the NPV is negative. 
E) No, because the project has a large negative cash ﬂow at the end of its life.

Quizplus · Accepted Answer

The question asks if the investment should be taken if the objective is to maximize wealth. The best tool to determine if an investment maximizes wealth is the net present value (NPV). Since the NPV is negative, the investment does not generate enough cash flow to meet the required return of 10%. Therefore, the investment should not be taken.

You Are Considering an Investment with the Following Cash ﬂOws