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1. Elderkin & Martin is considering an investment which will cost \$200,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is \$55,000. This inflow will increase to \$120,000 and then \$200,000 for the following two years before ceasing permanently. The firm requires a 14 percent rate of return and has a required discounted payback period of four years. The firm should _____ the project because the discounted payback period is _____ years. Accept or reject this project? Why? A. accept; 2.26 B. accept; 2.49 C. accept; 3.65 D. reject; 3.26 E. reject; 3.96 Year Cash Flow Discounted Cash Flow Cumulative DCF 1 0 0 0 2 55,000 42,320.71 42,320.71 3 120,000 80,996.58 123,317.30 4 200,000 118,416.06 241,733.35 5 200,000 103,873.73 345,607.08 The remainder after 3 years is 200,000 123,317.30 = 76,682.70. It is covered over 76,682.70/118,416.06 = 0.65 of the year. The payback is therefore 3.65. The required payback period is higher at 4 years. Accept the project 2. You are considering the following two mutually exclusive projects. The required rate of return is 10.75 percent for project A and 12 percent for project B. Which project should you accept and why? A. project A; because it has the lower required rate of return B. project A; because its NPV is about \$796 more than the NPV of project B C. project B; because it has the larger NPV D. project B; because it returns all its cash flows within two years E. project B; because it is the largest sized project NPV A = \$14,610.09, NPV B = \$13,814.92 therefore A has about \$796 more in NPV. 3. The discounted payback period of a project will decrease whenever the:
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