Here are the expected cash flows for three projects: a. What is the payback peri
ID: 2788377 • Letter: H
Question
Here are the expected cash flows for three projects:
a. What is the payback period on each of the projects?
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.)
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
Cash Flows (dollars) Project Year: 0 1 2 3 4 A 6,700 + 1,425 + 1,425 + 3,850 0 B 2,700 0 + 2,700 + 2,850 + 3,850 C 6,700 + 1,425 + 1,425 + 3,850 + 5,850Explanation / Answer
Payback period for the projects are:
Year
Cashflow A
Cumulative cashflow A
0
-6700
-6700
1
1425
-5275
2
1425
-3850
3
3850
0
4
0
0
Cumulative Cashflow at year 3 is zero
Payback period = 3 years
Year
Cashflow B
Cumulative cashflow B
0
-2700
-2700
1
0
-2700
2
2700
0
3
2850
2850
4
3850
6700
Cumulative Cashflow at year 2 is zero
Payback period = 2 years
Year
Cashflow C
Cumulative cashflow C
0
-6700
-6700
1
1425
-5275
2
1425
-3850
3
3850
0
4
5850
5850
Cumulative Cashflow at year 3 is zero
Payback period = 3 years
Answer a.
The payback period for projects are:
Project A = 3 years
Project B = 2 years
Project C = 3 years
Answer b. If cutoff period is 2 years, Project B will be accepted based on calculation in the excel.
Answer c. If cutoff period is 3 years, wwe will accept all the project ie Project A, Project C and Project B also as it is less than 3 years.
Answer d.1.
The NPV calculation for projects at 11% cost of capital are as below:
Year
Cashflow A
0
-6700
1
1425
2
1425
3
3850
4
0
NPV at 11%
-1301.41
Year
Cashflow B
0
-2700
1
0
2
2700
3
2850
4
3850
NPV at 11%
3703.96
Year
Cashflow C
0
-6700
1
1425
2
1425
3
3850
4
5850
NPV at 11%
2170.28
Answer d.2. The projects which have positive NPVs are Project B and Project C as based on the calculation in answer d.1
Answer e. False payback doesnt give too much weight to cashflows that occur after the cutoff date.
Year
Cashflow A
Cumulative cashflow A
0
-6700
-6700
1
1425
-5275
2
1425
-3850
3
3850
0
4
0
0
Cumulative Cashflow at year 3 is zero
Payback period = 3 years
Year
Cashflow B
Cumulative cashflow B
0
-2700
-2700
1
0
-2700
2
2700
0
3
2850
2850
4
3850
6700
Cumulative Cashflow at year 2 is zero
Payback period = 2 years
Year
Cashflow C
Cumulative cashflow C
0
-6700
-6700
1
1425
-5275
2
1425
-3850
3
3850
0
4
5850
5850
Cumulative Cashflow at year 3 is zero
Payback period = 3 years
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