Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively. $$\begin{array} { | l | c | c | c | c | }
\hline \text { Time } & 0 & 1 & 2 & 3 \
\hline \text { Project A Cash Flow } & - 20,000 & 10,000 & 30,000 & 1,000 \
\text { Project B Cash Flow } & - 30,000 & 10,000 & 20,000 & 50,000 \
\hline
\end{array}$$
A)Accept both A and B
B)Accept neither A nor B
C)Accept A, reject B
D)Reject A, accept B

Question

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively. $$\begin{array} { | l | c | c | c | c | } 
\hline \text { Time } & 0 & 1 & 2 & 3 \
\hline \text { Project A Cash Flow } & - 20,000 & 10,000 & 30,000 & 1,000 \
\text { Project B Cash Flow } & - 30,000 & 10,000 & 20,000 & 50,000 \
\hline
\end{array}$$
A)Accept both A and B
B)Accept neither A nor B
C)Accept A, reject B
D)Reject A, accept B

Quizplus · Accepted Answer

To determine the best choice, we must compare the payback and discounted payback periods of both projects to their respective maximum allowable periods.

For Project A:

- Payback period: 2 years
- Discounted payback period: 2.69 years

Since both the payback and discounted payback periods are lower than their respective maximum allowable periods, Project A can be accepted.

For Project B:

- Payback period: 3 years
- Discounted payback period: 3.59 years

Both the payback and discounted payback periods are higher than their respective maximum allowable periods, which means Project B cannot be accepted.

Therefore, the best choice is to accept Project A and reject Project B, which is choice C.

Suppose Your Firm Is Considering Two Mutually Exclusive, Required Projects