Question 1

Here is the table of cash flows for two projects:

Assume these projects are mutually exclusive and the cost of capital is 12.6%. Which of the following statements are true?

A. The payback period of project A is 2.19 years.

B. You'll accept project A since its NPV is about $872.85 greater than that of project B.

C. You'll accept project B since its payback period is shorter than project A.

D. Both (A) and (B) are true.

E. Both (A) and (C) are true.

Question 2:

Following #1, which of the following statements about the payback rule is true?

A. There might be a conflict between the payback rule and the NPV rule.

B. The payback rule could indicate the (net) value of the project.

C. The payback rule uses the idea of time value of money.

D. Both (A) and (C) are true.

\begin{tabular}{l|l|l|l|l} Year & 0 & 1 & 2 & 3 \\ \hline Project A & $50,000 & $24,200 & $16,800 & $46,500 \\ \hline Project B & $45,000 & $39,000 & $18,000 & $18,000 \end{tabular}