Question

thorough and no excel solutions please:)

need answers for parts a-c

A firm is considering the following projects. Its opportunity cost of capital is 10%. Cash Flows, $ Project Time: 2 +1,825 +4,300 +1,825 3 +4,650 +3,650 -8,300 -4,300 -8,300 +1,825 В +4,650 +8,300 +1,825 +4,650 a. What is the payback period on each project? Project A | years Project B years Project C years What is the discounted payback period on each project? (Round your answers to 2 decimal places. If any of the projects does not pay back on a discounted basis enter zero ("O").) Project A years Project B years Project C | years b. Given that you wish to use the payback rule with a cutoff period of 2 years, which projects would you accept? Project B c. If you use a cutoff period of 3 years with the discounted payback rule, which projects would you accept? (Click to select)

Answer 1

Payback Period calculation gives us an idea that how long it will take for a project to recover the initial investment.

We can use cumulative cash flow table to see that when the cumulative cash flow is equal to zero (or non-negative).

a.

Year (n)	Cash flow from project A (CF)	Cumulative cash flow	Cash flow from project B (CF)	Cumulative cash flow	Cash flow from project C (CF)	Cumulative cash flow
0	-$8,300	-$8,300	-$4,300	-$4,300	-$8,300	-$8,300
1	$1,825.0	-$6,475	$0.0	-$4,300	$1,825.0	-$6,475.0
2	$1,825.0	-$4,650	$4,300.0	$0	$1,825.0	-$4,650.0
3	$4,650.0	$0	$3,650.0	$3,650	$4,650.0	$0.0
4	$0.0	$0.0	$4,650.0	$8,300	$8,300.0	$8,300.0
	(In Years)
Payback Period for project A =	3.00
Payback Period for project B =	2.00	Lowest
Payback Period for project C =	3.00
Payback Period (period where cumulative cash flow is zero) = X + (Y/Z)
Where,
X = Last period with a negative cumulative cash flow;
Y = Absolute value of cumulative cash flow at the end of the period X;
Z = cash flow during the period after X.

Discounted Payback period Calculation:

Year (n)	Cash flow from project A (CF)	PV = CF/(1+10%)^n	Cumulative Discounted cash flow	Cash flow from project B (CF)	PV = CF/(1+10%)^n	Cumulative Discounted cash flow	Cash flow from project C (CF)	PV = CF/(1+10%)^	Cumulative Discounted cash flow	Formula used for PV calculation
0	-$8,300	-$8,300	-$8,300	-$4,300	-$4,300	-$4,300	-$8,300	-$8,300	-$8,300	CF/(1+10%)^0
1	$1,825.0	$1,659	-$6,641	$0.0	$0	-$4,300	$1,825.0	$1,659	-$6,640.9	CF/(1+10%)^1
2	$1,825.0	$1,508	-$5,133	$4,300.0	$3,554	-$746	$1,825.0	$1,508	-$5,132.6	CF/(1+10%)^2
3	$4,650.0	$3,494	-$1,639	$3,650.0	$2,742	$1,996	$4,650.0	$3,494	-$1,639.0	CF/(1+10%)^3
4	$0	$0	-$1,639	$4,650.0	$3,176	$5,172	$8,300.0	$5,669	$4,030.0	CF/(1+10%)^4
	(In Years)
Discounted Payback Period for project A =	-
Discounted Payback Period for project B =	2.27	Lowest
Discounted Payback Period for project C =	3.29
Payback Period (period where cumulative cash flow is zero) = X + (Y/Z)
Where,
X = Last period with a negative cumulative cash flow;
Y = Absolute value of cumulative cash flow at the end of the period X;
Z = cash flow during the period after X.

b. If payback rule with cutoffs period of 2 years then only project B will be accepted as it has payback period equals to 2 years

c. If discounted payback rule with cutoffs period of 3 years then only project B will be accepted as it has discounted payback period equals to 2.27 years