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Here are the expected cash flows for three projects: Cash Flows (dollars) Project Year: 0 1...

Here are the expected cash flows for three projects:

Cash Flows (dollars)
Project Year: 0 1 2 3 4
A − 6,300 + 1,325 + 1,325 + 3,650 0
B − 2,300 0 + 2,300 + 2,650 + 3,650
C − 6,300 + 1,325 + 1,325 + 3,650 + 5,650

a. What is the payback period on each of the projects?

b. If you use a cutoff period of 2 years, which projects would you accept?

Project A

Project B

Project C

Project A and Project B

Project B and Project C

Project A and Project C

Projects A, B, and C

None

c. If you use a cutoff period of 3 years, which projects would you accept?

Project A

Project B

Project C

Project A and Project B

Project B and Project C

Project A and Project C

Projects A, B, and C

None

d-1. If the opportunity cost of capital is 11%, calculate the NPV for projects A, B, and C. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

d-2. Which projects have positive NPVs?

Project A

Project B

Project C

Project A and Project B

Project B and Project C

Project A and Project C

Projects A, B, and C

None

e. "Payback gives too much weight to cash flows that occur after the cutoff date." True or false?

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Homework Answers

Answer #1

a.

Project A payback period= 3 years as it first three years cash flows sum is equal to 6300 which is the investment amount.

Project B payback period= 2 years as it first two years cash flows sum is equal to 2300 which is the investment amount.

Project C payback period= 3 years as it first three years cash flows sum is equal to 6300 which is the investment amount.

b.

Project B is answer as it is the only project which has payback of 2 year

c.

Projects A, B, and C as all three comes under 3 years payback

d.1.

NPV of A=-6300+1325/1.11^1+1325/1.11^2+3650/1.11^3+0/1.11^4=-1362.06

NPV of B=-2300+0/1.11^1+2300/1.11^2+2650/1.11^3+3650/1.11^4=3908.76

NPV of C=-6300+1325/1.11^1+1325/1.11^2+3650/1.11^3+5650/1.11^4=2359.77

d.2.

Project B and Project C based on calculation in d.1.

e.

false

the above are the answers

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