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 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? Project Payback period A 4 years B 1.07 years C 2.109 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 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.) Project NPV A $ B $ C $ 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? True False

Explanation / Answer

For project A the investment 6300 should be recovered after payback period ,after 3 years 1325+1325+3650 =6300 is recovered ,thus all investment 6300 is recovered after 3 years thus payback period for A is 3 years.

For project B the investment 2300 should be recovered after payback period ,after 1 years 2300 is recovered ,thus all investment 2300 is recovered after 1 years thus payback period for B is 1 years.

For project C the investment 6300 should be recovered after payback period ,after 3 years 1325+1325+3650 =6300 is recovered ,thus all investment 6300 is recovered after 3 years thus payback period for C is 3 years.

If you use a cutoff period of 2 years, projects B would you accept as its payback period <=2 years.

If you use a cutoff period of 3 years, projects A,B and C would you accept as their payback period <= 3 years.

Projects B and C have positive NPVs.

MARR( r) 11.00% CF=Cash Flow CF=Cash Flow Present value t CF(A) (=CF(A)/(1+r)^t 0 -6300 -6300 1 1,325 1193.693694 2 1,325 1075.399724 3 3,650 2668.848542 4 0 0 NPVA=sum of above PVs $                        -1,362.06 MARR( r) 11.00% CF=Cash Flow CF=Cash Flow Present value t CF(B) (=CF(B)/(1+r)^t 0 -2300 -2300 1 2,300 2072.072072 2 2,650 2150.799448 3 3,650 2668.848542 NPVB=sum of above PVs $                          4,591.72 MARR( r) 11.00% CF=Cash Flow CF=Cash Flow Present value t CF(C) (=CF(C)/(1+r)^t 0 -6300 -6300 1 1,325 1193.693694 2 1,325 1075.399724 3 3,650 2668.848542 4 5,650 3721.830004 NPVC=sum of above PVs $                          2,359.77

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