University of Central Florida (UCF) FIN3403 Business Finance Practice Exam 3

Management should accept the project because the payback period of 3.33 years is less than the cutoff period of 5 years. The payback period represents the time it takes for an investment to generate an amount of income equal to the cost of the investment. In this case, since the project will recover its initial investment faster than the predetermined acceptable timeframe, it indicates that the investment is likely to provide a favorable return and will be a sound decision for the organization. This aligns with the principle that projects with shorter payback periods reduce exposure to risk and improve cash flow earlier, making it a preferable choice for management.