Reference no: EM132589252

Question 1: A company is considering a new product that will increase its net profits. As part of the payback period analysis of this project, management has estimated the following revenues and costs for the first year:

Year 1

Revenues               $69,000

COGS                    51,000

CCA                       3,890

Interest expense      4,000

If the company has a tax rate of 25%, which of the following represents the correct amount to be included in the payback period analysis for Year 1?

a) $10,582

b) $11,472

c) $13,500

d) $14,472

Question 2: Which of the following statements is correct with respect to the internal rate of return (IRR) method?

a) The IRR method is useful in comparing mutually exclusive projects.

b) Projects are accepted if the IRR is less than the project's cost of capital.

c) The IRR method assumes cash flows are reinvested at a rate equal to the IRR.

d) Cash flows occurring later in the life of the project are ignored under the IRR method.

Question 3: Which of the following statements is correct with respect to the payback period method?

a) Typically, the time value of money is incorporated.

b) It is a reasonable indicator of liquidity impact.

c) It is not reliable when future cash flows have multiple sign changes.

d) The longer payback period is preferred.