Question

which of the following statements is true for a project with a $19,250 initial cost, cash inflows of $5,500 per year for 6 years, and a discount rate of 15%? it's payback period is 3.5 years. it's npv is $2,094. it's irr is 17.85%. it's profitability index is 0.104.

Answer 1

The only statement that can be determined with the given information is the payback period.

The payback period is the length of time it takes for the cumulative cash inflows to equal the initial cost of the project. In this case, the initial cost is $19,250 and the cash inflows are $5,500 per year for 6 years, so the cumulative cash inflows would be:

Year 1: $5,500
Year 2: $11,000
Year 3: $16,500
Year 4: $22,000
Year 5: $27,500
Year 6: $33,000

At the end of year 3, the cumulative cash inflows equal $16,500, which is greater than the initial cost of $19,250. Therefore, the payback period for this project is between 3 and 4 years. To find the exact payback period, we can use the formula:

Payback period = (Initial cost - Cumulative cash inflows before the payback year) / Cash inflows in the payback year

For this project, the payback period can be calculated as:

Payback period = (19,250 - 16,500) / 5,500 = 0.5 years

Therefore, the true statement is: Its payback period is 3.5 years.