Question

Hi all,

Can someone please answer this CASH FLOW question. Thank you.

Consider the following information:

	Cash Flows ($)
Project	C0	C1	C2	C3	C4
A	–5,500	1,500	1,500	3,500	0
B	–500	0	400	2,500	3,500
C	3,800	500	3,100	1,000	500

a. What is the payback period on each of the above projects? (Round your answers to 2 decimal places.)

Project	Payback Period
A	year(s)
B	year(s)
C	year(s)

b. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept?

	Project B
	None
	Project C
	Project A, Project B, and Project C
	Project A and Project C
	Project A and Project B
	Project B and Project C
	Project A

c. If you use a cutoff period of three years, which projects would you accept?

	Project B
	Project A and Project C
	Project A, Project B, and Project C
	Project C
	Project A and Project B
	Project A
	Project B and Project C

d. If the opportunity cost of capital is 10%, which projects have positive NPVs?

	Project A, Project B, and Project C
	Project A
	Project A and Project C
	Project B
	Project A and Project B
	Project C
	Project B and Project C

e. “If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” True or false?

	True
	False

f-1. If the firm uses the discounted-payback rule, will it accept any negative-NPV projects?

	Yes
	No

f-2. Will it turn down positive-NPV projects?

	Yes
	No

Answer 1

a.  

Year	0	1	2	3	4
Cash Flow A	-5500	1500	1500	3500	0
Cumulative Cash flow	-5500	-4000	-2500	1000	1000
Payback Period	2.71	(2+2500/3500)
Year	0	1	2	3	4
Cash Flow B	-500	0	400	2500	3,500
Cumulative Cash flow	-500	-500	-100	2400	5900
Payback Period	2.04	(2+100/2500)
Year	0	1	2	3	4
Cash Flow C	-3800	500	3100	1000	500
Cumulative Cash flow	-3800	-3300	-200	800	1300
Payback Period	2.20	(2+200/1000)

b. Option None because payback period is more than cut off period

c. Option c . Project A,B,C payback period is less than cut off period.

d. NPV of A =PV of Cash flows - Investment =1500/(1+10%)+1500/(1+10%)^2+3500/(1+10%)^3-5500 = -267.09
NPV of B =PV of Cash flows - Investment =0/(1+10%)+400/(1+10%)^2+2500/(1+10%)^3+3500/(1+10%)^4-500 = 4099.41
NPV of C =PV of Cash flows - Investment=500/(1+10%)+3100/(1+10%)^2+1000/(1+10%)^3+500/(1+10%)^4-3800=309.35
Last option project B and C
e. True,

f. Yes. Because it fails to include cash flows after payback period which might be negative.

g.Yes.In case cash flows are positive after the payback period