manager number two expects the project to provide cash inflows of 5 000 at the end o 634154

Aug 30, 2021 | Uncategorized

Items 1 and 2 are based on the following information:

The financial management team of a company is assessing an investment proposal involving a $100,000 outlay today. Manager number one expects the project to provide cash inflows of $20,000 at the end of each year for six years. She considers the project to be of low risk, requiring only a 10% rate of return. Manager number two expects the project to provide cash inflows of $5,000 at the end of the first year, followed by $23,000 at the end of each year in years two through six. He considers the project to be of medium risk, requiring a 14% rate of return. Manager number three expects the project to be of high risk, providing one large cash inflow of $135,000 at the end of the sixth year. She proposes a 15% rate of return for the project.

Additional information

Number of years

Discount rate (percent)

Present value of $1 due at the end of n periods (PVIF)

Present value of an annuity of $1 per period for n periods (PVIFA)

1

10

.9091

.9091

1

14

.8772

.8772

1

15

.8696

.8696

5

10

.6209

3.7908

5

14

.5194

3.4331

5

15

.4972

3.3522

6

10

.5645

4.3553

6

14

.4556

3.8887

6

15

.4323

3.7845

According to the net present value criterion, which of the following is true?

  1. Manager one will recommend that the project be accepted.
  2. Manger two will recommend that the project be accepted.
  3. All three managers will recommend acceptance of the project.
  4. All three managers will recommend rejection of the project.

Which manager will assess the project as having the shortest payback period?

  1. Manager one.
  2. Manager two.
  3. Manager three.
  4. All three managers will agree on the payback period.