Question

The Square Box is considering two projects, both of which have an initial cost of $35,000 and total cash inflows of $50,000. The cash inflows of project A are $5,000, $10,000, $15,000, and $20,000 over the next four years, respectively. The cash inflows for project B are $20,000, $15,000, $10,000, and $5,000 over the next four years, respectively. Which one of the following statements is correct if The Square Box requires a 13 percent rate of return and has a required discounted payback period of 3.5 years? Both projects should be accepted. Both projects should be rejected. Project A should be accepted and project B should be rejected. Project A should be rejected and project B should be accepted. You should be indifferent to accepting either or both projects.

Answer 1

Answer:

project A should be rejected and project B should be accepted

Explanation:

Discounted payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative discounted cash flows

For project A

Discounted cash flows

Year 1 = 20000 / 1.13 = 17,699.12

Year 2 = 15,000 / 1.13^2 = 11,747.20

year 3 = 10,000 / 1.13^3 = 6930.50

Year 4 = 5000 / 1.13^4 = 3066.59

Discounted payback = 2.8 years