Here are the expected cash flows for three projects: a. What is the payback peri

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 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

Explanation / Answer

Project A:

Cumulative cash flows for
year 0: -5500
year 1: -5500+1125=-4375
year 2: -4375+1125=-3250
year 3: -3250+3250=0

So, payback is 3 years

Project B:

Cumulative cash flows for
year 0: -1500
year 1: -1500+0=-1500
year 2: -1500+1500=0

So, payback is 2 years

Project C:

year 0: -5500
year 1: -5500+1125=-4375
year 2: -4375+1125=-3250
year 3: -3250+3250=0

So, payback is 3 years

We choose those projects whose payback is less than or equal to cutoff

If cutoff is 2 years, we will choose Project B
If cutoff is 3 years, we will choose Project A,B &C

Project A:
NPV=-5500+1125/1.11+1125/1.11^2+3250/1.11^3+0=-1197.04
Project B:
NPV=-1500+0+1500/1.11^2+2250/1.11^3+3250/1.11^4=3503.49
Project C:
NPV=-5500+1125/1.11+1125/1.11^2+3250/1.11^3+5250/1.11^4=2261.298

Project B& C have positive NPVs

False..Payback does not give any weight to cash flows occurring after the cutoff date

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