Cash Flows (dollars) Given that you wish to use the payback rule with a cutoff p

Question

Cash Flows (dollars)

Given that you wish to use the payback rule with a cutoff period of 2 years, which projects would you accept?

If the opportunity cost of capital is 8%, calculate the NPV for project A. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

If the opportunity cost of capital is 8%, calculate the NPV for project B. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

If the opportunity cost of capital is 8%, calculate the NPV for project C. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Cash Flows (dollars)

Project Year: 0 1 2 3 4 A 6,100 +3,500 +2,600 +3,000 0 B 2,100 0 +1,000 +1,100 +4,100 C 6,100 +1,000 +1,000 +2,100 +2,000

Explanation / Answer

Working

Note : Payback period is the period in which Cumulative cash flow is equal to zero

b.Given that you wish to use the payback rule with a cutoff period of 2 years, which projects would you accept?  

Project A

c. If you use a cutoff period of 4 years, which projects would you accept?

All of the above

d-1.If the opportunity cost of capital is 8%, calculate the NPV for project A. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPV A = -6100 + 3500/1.08 + 2600/1.08^2 + 3000/1.08^3

NPV A = $ 1751.32

d-2.If the opportunity cost of capital is 8%, calculate the NPV for project B. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPVB = -2100 + 0/1.08 + 1000/1.08^2 + 1100/1.08^3 + 4100/1.08^4

NPVB  = $ 2644.18

d-3.If the opportunity cost of capital is 8%, calculate the NPV for project C. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPVC  = -6100 + 1000/1.08 + 1000/1.08^2 + 2100/1.08^3 + 2000/1.08^4

NPVC = - $ 1179.63

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

False

Note : Payback gives too much weight to cash flows that occur before the cutoff date

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

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