Management uses the payback period method

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Reference no: EM131620297

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

Reference no: EM131620297

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