Question

Consider the following information:

Cash Flows ($) Project C0 C1 C2 C3 C4

A –6,300 2,300 2,300 2,000 0

B –1,600 0 1,000 3,300 4,300

C –3,700 2,300 1,000 1,800 1,300

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 A and Project B

Project A

None

Project A, Project B, and Project C

Project A and Project C

Project C

Project B and Project C

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 A and Project B

Project B

Project C

Project A and Project C

Project A, Project B, and Project C

d. If the opportunity cost of capital is 9%, which projects have positive NPVs?

Project A and Project B

Project A and Project C

Project B

Project C

Project A, Project B, and Project C

Project B and Project C

Project A

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

Project A
Year	Cash flow stream	Cumulative cash flow
0	-6300	-6300
1	2300	-4000
2	2300	-1700
3	2000	300
4	0	300

Payback period is the time by which undiscounted cashflow cover the intial investment outlay

this is happening between year 2 and 3

therefore by interpolation payback period = 2 + (0-(-1700))/(300-(-1700))

2.85 Years

Project B
Year	Cash flow stream	Cumulative cash flow
0	-1600	-1600
1	0	-1600
2	1000	-600
3	3300	2700
4	4300	7000

Payback period is the time by which undiscounted cashflow cover the intial investment outlay

this is happening between year 2 and 3

therefore by interpolation payback period = 2 + (0-(-600))/(2700-(-600))

2.18 Years

Project C
Year	Cash flow stream	Cumulative cash flow
0	-3700	-3700
1	2300	-1400
2	1000	-400
3	1800	1400
4	1300	2700

Payback period is the time by which undiscounted cashflow cover the intial investment outlay

this is happening between year 2 and 3

therefore by interpolation payback period = 2 + (0-(-400))/(1400-(-400))

2.22 Years

b

none, all have payback period above cut off of 2 years

c

Project A, B & C

d

Project A
Discount rate	9.000%
Year	0	1	2	3	4
Cash flow stream	-6300	2300	2300	2000	0
Discounting factor	1.000	1.090	1.188	1.295	1.412
Discounted cash flows project	-6300.000	2110.092	1935.864	1544.367	0.000
NPV = Sum of discounted cash flows
NPV Project A =	-709.68
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project B
Discount rate	9.000%
Year	0	1	2	3	4
Cash flow stream	-1600	0	1000	3300	4300
Discounting factor	1.000	1.090	1.188	1.295	1.412
Discounted cash flows project	-1600.000	0.000	841.680	2548.205	3046.228
NPV = Sum of discounted cash flows
NPV Project B =	4836.11
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project C
Discount rate	9.000%
Year	0	1	2	3	4
Cash flow stream	-3700	2300	1000	1800	1300
Discounting factor	1.000	1.090	1.188	1.295	1.412
Discounted cash flows project	-3700.000	2110.092	841.680	1389.930	920.953
NPV = Sum of discounted cash flows
NPV Project C =	1562.65
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Project B & C as NPV is positive

Please ask remaining parts separately