Question

EASY Q

1. Ray Inc. is evaluating three mutually exclusive Generating value for shareholders is the primary project evaluating criteria for Ray Inc. However, as a second-order concern, they do look at project liquidity. Their cutoff payback period is 3 years. Given below are various outputs generated by the finance team regarding these three projects.

	Project 1	Project 2	Project 3
NPV	$3,350,000	$3,350,000	$3,000,000
Payback period	2.51 years	2.83 years	4 years

Group of answer choices

Project 1 only.

Project 1 and 2.

Project 2 only.

Project 1 and 3.

Answer 1

The Project 1 shall be accepted since the project is generating maximum value to the firm as well as the payback period is within the cutoff payback period of 3 years and lowest among all the three projects.

The Project 2 shall not be accepted even though the project is generating same value to the firm as Project A is generating but the the payback period is greater than the payback period of Project A

Project 3 is generating a positive NPV but lower than the NPV of Project A and Project B. Further the payback period of this project is not within the acceptable cutoff period of 3 years, hence the same shall not be accepted.

So, the correct answer is Project 1 only.

Feel free to ask in case of any query relating to this question