Question

Here are the expected cash flows for three projects: Cash Flows (dollars) Project Year: 1 2 3 4 1,250 3,500 - 6,000 - 2,000 - 6,000 1,250 2,000 1,250 +3,500 5,500 2,500 1,250 3,500 a. What is the payback period on each of the projects? b. If you use the payback rule with a cutoff period of 2 years, which projects will you accept? c. If you use a cutoff period of 3 years, which projects will you accept? d-1. If the opportunity cost of capital is 9%, 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.) d-2. Which projects have positive NPVS? e. "Payback gives too much weight to cash flows that occur after the cutoff date." True or false? Project A Years Project B Project C Years Payback period a. Years b. If you use the payback rule with a cutoff period of 2 years, which projects will you accept? If you use a cutoff period of 3 years, which projects will you accept? d-1. If the opportunity cost of capital is 9%, calculate the NPV for projects A, B, and C. d-2. Which projects have positive NPVS? |с. е. "Payback gives too much weight to cash flows that occur after the cutoff date." True or false?

Answer 1

DATE: 1 Clav We have differenticel Cash flow after Tax [FAT. Pay Back PPeriod = Time at which CFAT = Initial Investment. Calculation of Cumulative CFAT Year Project A CEAT Cumulative - CFAT Project B CFAT Cumulative CFAT Project C CEAT Cumulative CFAT 2 & WN 1250 1250 3500 - 1250 2500 6000 - - 2000 2500 3500 - 2000 4500 8000 1250 1250 1250 2500 3500 6000 S500 11500 Initial Investment 6000 2000 6000 ... Pay Back Period For Project A = 3 years For Project B = 2 years For Project c = 3 years b) If the Cut off period is 2 years then we will select Project B as it is have pay back period of 2 years We can not select Project A orc as they have pay back period of 3 years each which is more than Cut off period of 2 years.

PAGE c If cut off period is 3 years then we can Select project A, B or cas projeo B hos pay back period of 2 years which is less than cut off period & Project A or chos the pay back period of 3 years So we can select any one of them. 11 If opportunity cost of Capital is 9% then Calaration of NPV For Calwaring Discounting factor@g% = 1 where n= no. of year (1+0.09) NPV of Project A Year CEAT Discounting Present Factor@g% Value 1 2 3 4= 2x3 WN-oh -6000 Godoy 12 So 12 So 3 500 0.9/74 0.8417 0.7722 - 6000 1146-75 1052 125 2702.70 - 1098.43 DF @ 9% Present Value -2000 NPV of Project B Year CFAT C -2000 Dago 2000 2500 3soo 0.9174 0.8417 0.7722 1683.40 1930 SO 2479.40 4093. 30 0.7084

PAGE DATE . NPV of Year o I Project c CFAT - 6000 1250 12 So 3soo 5500 DE@9% 1 0.9174 0. 8417 0.7722 0.7084. Present Value -6000 114 6.75 los2.125 2702.70 3896.20 2797.78 3 2] Project B & Project C has positive NPUs.