Question

Consider the following information:

	Cash Flows ($)
Project	C0	C1	C2	C3	C4
A	–6,000	2,000	2,000	2,700	0
B	–1,300	0	1,000	3,000	4,000
C	–4,000	1,000	2,600	1,500	1,000

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

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

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

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

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

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