Question

Let x = the last digit of you Username. Your firm is considering a project that has an NPV of $32,600, an IRR of 9.5 percent, and a payback period of 8.9 years. The required return is (x+5)% and the required payback period is (x+4) years. Which one of the following statements correctly applies to this project?

A) The net present value indicates accept while the internal rate of return indicates reject.

B) The payback decision rule is sufficient in making the decision about the project.

C) The payback decision rule is against the accept decision indicated by the net present value.

D) The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision.

E) The net present value decision rule is the only rule that matters when making the final decision.

Answer 1

HI

This question depends upon last digit of user name. Lets assume last digit of username is 4.

Then x=4

required rate = 4+5 = 9%

required payback = 4+4 =8 years

Since NPV is positive and IRR is greater than required return then based on NPV and IRR project should be accepted and it is sufficient information regardless of  payback period.

First option is wrong since both NPV and IRR states that project should be accepted.

Payback decision is not sufficient to make the decision hence second option is wrong.

Since actual payback is higher than required payback period hence option C is correct

hence option C is correct here.

Thanks