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
ANS
Project 1 only.
Project 1 and 2.
Project 2 only.
Project 1 and 3.
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.
Get Answers For Free
Most questions answered within 1 hours.