Project 1 |
Project 2 |
Project 3 |
|
NPV |
$3,350,000 |
$3,350,000 |
$3,000,000 |
Payback period |
2.51 years |
2.83 years |
4 years |
Group of answer choices
Project 1 and 2.
Project 1 and 3.
Project 2 only.
Project 1 only.
The Project 1 shall be accepted since the project is generating maximum value to the firm as well as the payback period is within the cutoff payback period of 3 years and lowest among all the three projects.
The Project 2 shall not be accepted even though the project is generating same value to the firm as Project A is generating but the the payback period is greater than the payback period of Project A
Project 3 is generating a positive NPV but lower than the NPV of Project A and Project B. Further the payback period of this project is not within the acceptable cutoff period of 3 years, hence the same shall not be accepted.
So, the correct answer is Project 1 only.
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