Question

The WACC is 10% for all projects.

                        Project A

Year	Cash Flow ($)
0	-5000
1	1000
2	1000
3	3000
4	0.00

               

                                Project B

Year	Cash Flow ($)
0	-1000
1	0
2	1000
3	2000
4	3000

                                    

Project C

Year	Cash Flow ($)
0	-5000
1	1000
2	1000
3	3000
4	5000

           

1. Which project has the superior payback period?

a)            Project C

b)           Project A

c)            Project B

2. If you use a cutoff period of 3 years with the discounted payback period rule, which project(s) would you accept?

a)           Project A

b)            Project B

c)            Project C

d)            All Projects

3. Which projects have positive NPVs?

1. Project A
2. Project B
3. Project C
4. Projects B and C

Answer 1

					Cumulative cash flow				Present value			Cumulative present value
	Year	A	B	C	A	B	C	PVIF	A	B	C	A	B	C
	0	-5000	-1000	-5000	-5000	-1000	-5000	1.0000	(5,000)	(1,000)	(5,000)	(5,000)	(1,000)	(5,000)
	1	1000	0	1000	-4000	-1000	-4000	0.9091	909	-	909	(4,091)	(1,000)	(4,091)
	2	1000	1000	1000	-3000	0	-3000	0.8264	826	826	826	(3,264)	(174)	(3,264)
	3	3000	2000	3000	0	2000	0	0.7513	2,254	1,503	2,254	(1,011)	1,329	(1,011)
	4	0	3000	5000	0	5000	5000	0.6830	-	2,049	3,415	(1,011)	3,378	2,405
									(1,011)	3,378	2,405
Ans a)	Payback period of
	A	3	year
	B	2	year
	C	3	year
	correct answer is option : C) Project B is superior as per payback period
Ans b)	we will accept project B . Because project B is having cumulative present value in year 3.
	therefore correct answer is option : b)            Project B
Ans c)	Correct answer is option d. Projects B and C