Question 18

Which of the following is NOT an example of information the payback period can provide to management?

minimize the impact of an investment on a firm's liquidity performance.

helps control the risks associated with the uncertainty of future cash flows.

helps control the risk of obsolescence or unexpected declines in value late in the life of an investment.

helps determine the project's total profitability.

Question 20

A firm is considering an investment in equipment for $25,000. Data related to the investment are as follows:

.......................Cash Flow

..Year...........Before Taxes

....1...................$12,500

....2.....................12,500

....3.....................12,500

....4.....................12,500

The firm uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent, and the life of the equipment is four years with no salvage value. The required rate of return is 12 percent.

What is the net present value of the investment?

$(2,222)

$5,370

$12,962

$30,370