Here are the expected cash flows for three projects: cash flows (dollars) Projec

Question

Here are the expected cash flows for three projects:

                           cash flows (dollars)   

Project Year :         0            1             2            3                4

A                       --5,500      +1,125   +1,125      +3,250          0

B                      --1,500          0          +1,500     +2,250      +3,250

C                      --5,500      +1,125     +1,125    +3,250       +5,250

a. what is the payback period on each of the project?

Project                       Payback period

A                                ___________years

B                               ___________years

C                              ____________years

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

Project A

Project B

Project C

Project A and B

Project B and C

Project A and 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 B

Project B and C

Project A and 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 calcualtions. Round your answers to 2 decimal places.)

Project               NPV

A                  $___________

B                 $___________

C                $___________

d-2 Which projects have a positive NPVs?

Project A

Project B

Project C

Project A and B

Project B and C

Project A and 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)

Explanation / Answer

a.) Clearly project has less payback so it should be chosen as we can recover the cost in this period of time.

b.)

Only project B should be chosen.

c.)

Project B should be chosen.

D.1

D.2) Project B & C.

e.) False as the method tries to accumulate zero on cumilative cash flows which are not discounted and project may generate cash flows high returns after the date or in later years. payback ignores the cash flow after the payback of investment intially is achieved.

Project year 0 1 2 3 4 Payback period whencumilative cash flow is zero A -5500 1125 1125 3250 0 Cumilative A inflows only -5500 -4375 -3250 0 0 Year 3 B -1500 0 1500 2250 3250 Cumilative B inflows only -1500 -1500 0 2250 5500 Year 2 C -5500 1125 1125 3250 5250 Cumilative C inflows only -5500 -4375 -3250 0 5250 Year 3

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.