Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs, cash flow for the third and final years of the project is $170,000.The company accepts all projects with a payback period of two years or less.
A)The payback rule would reject this project because of its risks are too high.
B)The payback rule would reject this project because all negative cash flows are added together.
C)If strictly applied, the payback rule would reject this project.
D)If strictly applied, the payback rule would accept this project.

Question

Quizplus · Accepted Answer

The payback period for this project is less than two years (initial investment of $115,000 divided by cash flows of $140,000 for each of the first two years) and the project has positive cash flows overall, including the final year. Therefore, if the payback rule is strictly applied, the project would be accepted.

Project Black Swan Requires an Initial Investment of $115,000