Here are the expected cash flows for three projects: Cash Flows (dollars Project

Question

Here are the expected cash flows for three projects: Cash Flows (dollars Project Year0 -6,200 +1.300 +1.300 +3,600 -2,200 -6,200 +1,300 +1.300 +3,600 +5,600 0 +2.200 +2,600 +3,600 a. What is the payback period on each of the projects? Project b. If you use a cutoff period of 2 years, which projects would you accept? O Project A O Project B O ProjectC O Project A and Project B O Project B and Project C O Project A and Project C O Projects A, B, and O c. If you use a cutoff period of 3 years, which projects would you accept? O Project A O Project B O ProjectC O Project A and Project B O Project B and Project C O Project A and Project C O Projects A, B, and O d-1· lf the opportunity cost of capital is 10%, 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.) 8

Explanation / Answer

Payback period = A + B/C

Where,
A = Last period with a negative cumulative cash flow;
B = Absolute value of cash flow at the end of the period A;
C = cash flow during the period after A.

Payback period = 3 years

Project B:

Payback period = 2 years

Project C:

Payback period = 3 years

b. Accept project B, Other projects have payback period more than the cutoff.

c.

Projects A,B, and C, all projects have payback period same as cutoff.

d.1

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

Project A:

Project B:

NPV = $4030.45

Project C:

NPV = $2585.81

d.2 -

Project B and C. Project A has negative NPV. Hence, should be rejected.

e.

False. Payback period doesn't consider cashflows that occur after the cutoff date.

Year Cashflow (A) Cumulative 0 -6200.00 -6200.00 1 1300.00 -4900.00 2 1300.00 -3600.00 3 3600.00 0.00 4 0.00 0.00

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