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Use the following information for Part A and B.
A project will cost $4800 today (T=0) and will generate $1250 in after-tax cash flows at the end of each of the next six years. Use a discount rate of 10.0%.
Part A:
If management uses the payback period method with a cut off of 5.0 years, management __________ invest in the project. If management uses the discounted payback period method with a cut off of 5.0 years, management __________ invest in the project.
A. will; will
B. will not; will
C. will; will not
D. will not; will not
E. impossible to tell without more information
Part B:
Which of the following statements is (are) FALSE:
I. The IRR is between 14% and 15% assuming the discount rate remains at 10.0%
II. If the discount rate decreased from 10.0% to 8.0%, the IRR would stay the same
III. If after tax cash flows decreased by 2.0% per year, the Profitability Index would increase
A. I
B. III
C. I & III
D. II & III
E. All of the statements
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