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Which of the following statements is correct about the following chart -0% per Year 10,000 5,000 End of Year 0 -5,000 Cumulative Present Worth ($) -10,000 1 = 20% per Year -15,000 - 20,000 - 25,000 The project will have a payback of 3
Which of the following statements is correct about the following chart -0% per Year 10,000 5,000 End of Year 0 -5,000 Cumulative Present Worth ($) -10,000 1 = 20% per Year -15,000 - 20,000 - 25,000 The project will have a payback of 3.2 years when the interest rate is increased to 20% The project will have a payback period of 5 years when the interest rate is increased to 20% The project will have a payback period of 5 years in the absence of the interest rate The interest rate will have no impact on the project cumulative present worth and payback period
Expert Solution
Only the second statement is correct.
The project has a payback of 3.2 years when interest rate is 20% is wrong (it is at 0%)
The project has a payback of 5 years when the interest rate is 20% is correct (you see that cumulative PW is zero at year 5 for the solid line which is PW at 20%)
The proejct has a payback of 5 years in teh absence of interest is wrong (it is 3.2 years)
Interest rate has no impact on project cumulative PW and payback is wrong (you see there are two different PW lines for different interest rates)
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