Question

1. The payback rule states that you invest in projects with paybacks less than 3 years.

   True

   False

2. What is the NPV of a project with the following cash flows and a 19% discount rate: Year 0: -10, Year 1: 2, Year 2: 3, and Year 3: 7?

   		-3
   		-2
   		-1
   		1

3.

1. Should you invest in the above project based on its NPV?

   		Yes
   		No
   		Insufficient data

Answer 1

The payback rule states that you invest in projects with paybacks less than 3 years is a false statement since the cut off period of payback is not fixed and it depends upon management to management

The NPV is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the NPV is computed as follows:

= - 10 + 2 / 1.19 + 3 / 1.19² + 7 / 1.19³

= - 2

Since NPV is negative, hence no investment shall be made

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