Question

The management of Niagara National Bank is considering an investment in automatic teller machines. The machines would cost $124,200 and have a useful life of seven years. The bank’s controller has estimated that the automatic teller machines will save the bank $27,000 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value.

Which of the following statements are true? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

check all that apply

• The net-present-value method is preferable to the payback method.unanswered
• The payback method is preferable to the net-present-value method.unanswered
• The payback period criterion fails to account for the time value of money.unanswered
• If management uses the payback method, the investment will be approved only if the required payback period meets or exceeds the years calculated.unanswered
• The cut-off value for the payback period is very much dependent on the bank's hurdle rate.unanswered
• The cut-off value for the payback period has nothing to do with the bank's hurdle rate.

Answer 1

Answer: True Statements:

1) The net-present-value method is preferable to the payback method.

This is because net present value considers "time value of money" which is not followed in Payback.

2) The payback period criterion fails to account for the time value of money.

This is because payback counts the years in which investment comes back without any time value of money discount.

3) The cut-off value for the payback period has nothing to do with the bank's hurdle rate.

This is because payback period has nothing to do with bank's hurdle rate as it is measured in years.