Leslie is charged with determining which small projects should be funded. Along with this assignment, she has been granted the use of $15,000 for a maximum of two years. She is considering three projects. Project A costs $7,500 and has cash flows of $4,000 a year for Years 1 to 3. Project B costs $8,000 and has cash flows of $3,000, $4,000, and $3,000 for Years 1 to 3, respectively. Project C costs $2,000 and has a cash inflow of $2,500 in Year 2. What decisions should she make regarding these projects if she assigns them a mandatory discount rate of 8.5 percent? Explain why. Answer options:
1. accept either Projects A and C or Projects B and C, but not all three as there is insufficient financing
2. accept Project C and reject Projects A and B because only Project C has a discounted payback that is less than two years
3. accept Projects A and C and reject Project B as they have the shortest discounted payback periods than fit within the $15,000 allocation
4. accept Projects A and C and reject Project B as A and B payback within two years
5. accept Projects B and C and reject Project A as this combination uses the most initial capital
Leslie is charged with determining which small projects should be funded. Along with this assignment, she has been granted the use of $15,000 for a maximum of two years. She is considering three projects. Project A costs $7,500 and has cash flows of $4,000 a year for Years 1 to 3. Project B costs $8,000 and has cash flows of $3,000, $4,000, and $3,000 for Years 1 to 3, respectively. Project C costs $2,000 and has a cash inflow of $2,500 in Year 2. What decisions should she make regarding these projects if she assigns them a mandatory discount rate of 8.5 percent? Explain why. Answer options:
1. accept either Projects A and C or Projects B and C, but not all three as there is insufficient financing
2. accept Project C and reject Projects A and B because only Project C has a discounted payback that is less than two years
3. accept Projects A and C and reject Project B as they have the shortest discounted payback periods than fit within the $15,000 allocation
4. accept Projects A and C and reject Project B as A and B payback within two years
5. accept Projects B and C and reject Project A as this combination uses the most initial capital
Related questions
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
| Time: | 0 | 1 | 2 | 3 |
| Project A Cash Flow | -34,000 | 24,000 | 44,000 | 15,000 |
| Project B Cash Flow | -44,000 | 24,000 | 6,000 | 64,000 |
Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?
accept both A and B
reject A, accept B
accept neither A nor B
accept A, reject B
