A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and $4,100 over the next four years, respectively. What is the payback period?

3.73 years

2.51 years

3.13 years

3.51 years

3.94 years

2

21

Alicia is considering adding toys to her gift shop. She estimates the cost of new inventory will be $9,500 and remodeling expenses will be $850. Toy sales are expected to produce net cash inflows of $1,300, $4,900, $4,400, and $4,100 over the next four years, respectively. Should Alicia add toys to her store if she assigns a 3-year payback period to this project? Why or why not?

No; The payback period is 3.94 years.

No; The payback period is 2.94 years.

Yes; The payback period is 3.94 years.

Yes; The payback period is 3.09 years.

Yes; The payback period is 2.94 years.

3

31

You are considering two mutually exclusive projects. Project A has cash flows of $72,000, $21,400, $22,900, and $56,300 for Years 0 to 3, respectively. Project B has cash flows of $81,000, $20,100, $22,200, and $74,800 for Years 0 to 3, respectively. Both projects have a required 2.5-year payback period. Should you accept or reject these projects based on payback analysis?

Accept Project A and reject Project B

Reject Project A and accept Project B

Accept both Projects A and B

Reject both Projects A and B

You cannot apply the payback method to these projects.

4

41

JJ's is reviewing a project with a required discount rate of 15.2 percent and an initial cost of $309,000. The cash inflows are $47,000, $198,000, and $226,000 for Years 2 to 4, respectively. Should the project be accepted based on discounted payback if the required payback period is 2.5 years?

Accept; The discounted payback period is 2.18 years.

Accept; The discounted payback period is 2.32 years.

Accept; The discounted payback period is 2.98 years.

Reject; The discounted payback period is 3.87 years.

Reject; The project never pays back on a discounted basis.

5

51

The Square Box is considering two independent projects with an initial cost of $18,000 each. The cash inflows of Project A are $3,000, $7,000, and $10,000 for Years 1 to 3, respectively. The cash inflows for Project B are $3,000, $7,000, and $15,000 for Years 1 to 3, respectively. The required return is 12 percent and the required discounted payback period is 3 years. Based on discounted payback, which project(s), if either, should be accepted?

Both projects should be accepted.

Both projects should be rejected.

Project A should be accepted and Project B should be rejected.

Project A should be rejected and Project B should be accepted.

You should be indifferent to accepting either or both projects.