Question

Question 6 (1 point)

Which ONE of the following statements about the payback method is true?

Question 6 options:

	The payback method is consistent with the goal of shareholder wealth maximization
	The payback method represents the number of years it takes a project to recover its initial investment plus a required rate of return.
	There is no economic rational that links the payback method to shareholder wealth maximization.
	None of these statements are true.

Question 7 (1 point)

McKenna Sports Authority is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $847,500, and $1,215,000 over the next three years. What is the payback period for this project? Round to four decimal places.

Your Answer:

Question 7 options:

Answer

Question 8 (1 point)

Monroe, Inc., is evaluating a project. The company uses a 13.8 percent discount rate for this project. Cost and cash flows are shown in the table. What is the NPV of the project?

Year Project

0 ($11,368,000)

1 $ 2,157,589

2 $ 3,787,552

3 $  3,125,650

4 $ 4,115,899

5 $ 4,556,424

Round to two decimal places.

Your Answer:

Question 8 options:

Answer

Answer 1

Q6. The correct answer is option c i.e. There is no economic rational that links the payback method to shareholder wealth maximization.

Q7. Payback period represents the time period in which the future cash flows from the project are able to recover the initial investment in the project.

Year	Cash Flows	Cumulative cash flows
0	- $ 1,850,000	- $ 1,850,000
1	$ 525,000	- $ 1,325,000 ( - $ 1,850,000 + $ 525,000)
2	$ 847,500	- $ 477,500 ( - $ 1,325,000 + $ 847,500 )
3	$ 1,215,000	$ 737,500 ( - $ 477,500 + $ 1,215,000)

As can be seen that the initial investment is recovered between year 2 and year 3, which signifies that the payback period lies between them and will be computed as follows:

= 2 years + Balance investment to be recovered / Next year cash flows

= 2 years + $ 477,500 / $ 1,215,000

= 2.3930 years Approximately

Q8. The NPV of the project is computed as shown below:

= - $ 11,368,000 + $ 2,157,589 / 1.138¹ + $ 3,787,552 / 1.138² + $ 3,125,650 / 1.138³ + $ 4,115,899 / 1.138⁴ + $ 4,556,424 / 1.138⁵

= $ 414,918.22 Approximately

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