Answered: Under which of the following decision…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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XYZ is considering investing in a new and cooking machine at an initial cost of $100,000. After close examination of the investment proposal, the firm’s CFO has determined that the expected after-tax cash flows from this operation for the next 5 years will be as followed:

Year Cash Flow

1 $10,000

2 $40,000

3 $40,000

4 $40,000

5 $10,000

Under which of the following decision rules will this project be accepted? Which decision rules are associated with a project rejection?

Payback Rule; three year cut-off point.
Discounted Payback Rule; three year cut-off point; assume that the discount rate, r=7%
Internal Rate of Return Rule; 7% required internal rate of return.
Net Present Value Rule.(Assume a 5% discount rate)
Profitability Index Rule. (Assume a 5% discount rate)
The most appropriate rule.

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