Question
In: Finance
The discounted payback rule: A. does not always choose the better project if the firm has...
The discounted payback rule:
A. does not always choose the better project if the firm has to decide between two mutually exclusive projects
B. always leads to selecting projects that decrease firm value
C. does not rely on a discount factor
D. ignores the time value of money
Solutions
Expert Solution
The Payback period is the time period when the initial invested amount will be recovered after getting in the cashflow it ignores the effect of Time value of money. But discounted payback period takes time value of money in account and calculate the net present value of the cash flows and estimates the time when the discounted cash flows get equal to initial investment.
So by this option C and D can not be the answer
Well it tells how fast the initial investment will be recovered, which may not be the right choice all the time as for example take 2 projects. One gives more cash flows in the initial years and then stop giving after completing the payback period and the another which give significant cash flow for a large time period. Then in this case the discounted payback period will be less for the first project. So we by seeing discounted payback period any one will choose project 1. But it will not be the right choice as it stops giving cash flows just after that. In this case second project will be a good choice as it give continuous significant cast flows for many years.
So option A is the correct answer i.e. It does not always choose the better project if the firm has to decide between two mutually exclusive projects
jeff jeffy answered 1 year agoRelated Solutions
1: The discounted payback period will A: always be longer than the payback period. B: uses...
1: The discounted payback period will
A: always be longer than the payback period.
B: uses discounted cash flows
C: both "A" and "B" are correct
D: is the same as the payback period
2: The cost of capital is:
A: another term for the market risk premium.
B: another term for the risk-free rate of return. c
C: the return on the overall market.
D: the minimum required return on a new investment
3: A special dividend
A: is...
Compute the Discounted Payback statistic for Project X and recommend whether the firm should accept or...
Compute the Discounted Payback statistic for Project X and
recommend whether the firm should accept or reject the project with
the cash flows shown below if the appropriate cost of capital is 14
percent and the maximum allowable discounted payback is 3
years.
Time:
0
1
2
3
4
5
Cash flow:
-960
460
520
440
340
190
Compute the PI statistic for Project X and note whether the firm
should accept or reject the project with the cash flows...
Compute the Discounted Payback statistic for Project X and recommend whether the firm should accept or...
Compute the Discounted Payback statistic for Project X and
recommend whether the firm should accept or reject the project with
the cash flows shown below if the appropriate cost of capital is 12
percent and the maximum allowable discounted payback is 3
years.
Time:
0
1
2
3
4
5
Cash flow:
-980
380
600
520
420
270
Multiple Choice
2.78 years, accept
3.44 years, reject
2.44 years, accept
4.78 years, reject
Compute the payback statistics (Not discounted) for Project X and recommend whether the firm should accept...
Compute the payback statistics (Not discounted) for
Project X and recommend whether the firm should accept or reject
the project with the cash flows shown as follows if the appropriare
cost of capital is 10 percent and the maximum allowable payback
is
five years.
Time:
0
1
2
3
4 5
Cash flow:
-75 -75
0 100
75 50
a. 3.67 years, accept
b. 4.67 years, accept
c. 3.67 years, reject
d. 4.67 years, reject
. Complete problems: NPV, IRR, MIRR, Profitability Index, Payback, Discounted Payback A project has an initial...
. Complete problems: NPV, IRR, MIRR, Profitability Index,
Payback, Discounted Payback A project has an initial cost of
$60,000, expected net cash inflows of $10,000 per year for 8 years,
and a cost of capital of 12%. Show your work. a. What is the
project’s NPV? (Hint: Begin by constructing a timeline). b. What is
the project’s IRR? c. What is the project’s MIRR? d. What is the
project’s PI? e. What is the project’s payback period? f. What is...
Problem 13-8 Discounted Payback (LG13-2) Compute the discounted payback statistic for Project D if the appropriate...
Problem 13-8 Discounted Payback (LG13-2)
Compute the discounted payback statistic for Project D if the
appropriate cost of capital is 11 percent and the maximum allowable
discounted payback is four years. (Do not round
intermediate calculations and round your final answer to 2 decimal
places. If the project does not pay back, then enter a "0"
(zero).)
Project D
Time:
0
1
2
3
4
5
Cash flow:
–$12,800
$3,530
$4,540
$1,880
$0
$1,360
Problem 13-8 Discounted Payback (LG13-2)
Compute...
What is the discounted payback period for the investment project that has the following cash flows,...
What is the discounted payback period for the investment project
that has the following cash flows, if the discount rate is 14
percent? (Do not round intermediate calculations and round your
final answer to 2 decimal places. (e.g., 32.16)) Year Cash
Flows
0 -13779
1 4470
2 5005
3 5877
4 6626
If we apply the discounted payback decision rule to all projects, it will likely lead to...
If we apply the discounted payback decision rule to all
projects, it will likely lead to ________________________.
some positive net present value projects to be rejected
the most liquid projects to be rejected in favor of the less
liquid projects
projects to be incorrectly accepted due to ignoring the time
value of money
a firm to become more long-term focused
some projects to be accepted which would otherwise be rejected
under the payback rule
__________ is the best example of...
the following techniques for analyzing projects: Payback Rule Discounted Payback Period Net Present Value Internal Rate...
the following techniques for analyzing projects:
Payback Rule
Discounted Payback Period
Net Present Value
Internal Rate of Return
Why must corporate managers use multiple techniques of project
evaluation?
Which technique is most commonly used and why?
Describe several ways the techniques above can be used as one
progresses in their professional career. (Identify specific types
of projects that can be analyzed and discuss the advantages and
disadvantages of using the techniques above)
Calculate the Payback Period and Discounted Payback Period for the following project: 1. An initial investment...
Calculate the Payback Period and Discounted Payback
Period for the following project:
1. An initial investment of $20,000 with expected after-tax
operating cash flows of $125,000 per year for each of the
next 3 years. However, in preparation for its
termination at the end of year 3, an additional investment of
$350,000 must be made at the end of Year 2.
Please show all work in excel.
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