Question

Ray Inc. is evaluating three mutually exclusive Generating value for shareholders is the primary project evaluating...

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.

Homework Answers

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.

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