Question

A firm is considering the following projects. Its opportunity cost of capital is 10%.

		Cash Flows, $
Project	Time:       0	1	2	3	4
A	-7,300	+1,575	+1,575	+4,150	0
B	-3,300	0	+3,300	+3,150	+4,150
C	-7,300	+1,575	+1,575	+4,150	+7,300

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, put in zero ("0").) 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 A Project B Project C Projects A, B Projects A, C Projects B, C Projects A, B, C

c.	If you use a cutoff period of 3 years with the discounted payback rule, which projects would you accept? Project A Project B Project C Projects A, B Projects A, C Projects B, C Projects A, B, C

Answer 1

Cash flows Year Project A Project B Project C AB 0 $ (7,300) $ (3,300) $ (7,300) 1 $ 1,575 $ - $ 1,575 2 $ 1,575 $ 3,300 $ 1,575 3 $ 4,150 $ 3,150 $ 4,150 4 $ - $ 4,150 $ 7,300 PVIF@10% Present value Simple cumulative cash flows Cumulative present value cash flows Project A Project B Project C Project A Project B Project C Project A Project B Project C AxE BxE CxE 1.000 $ (7,300) $ (3,300) $ (7,300) $ (7,300) $ (3,300) $ (7,300) $ (7,300) $ (3,300) $ (7,300) 0.909 $ 1,432 $ - $ 1,432 $ (5,725) $ (3,300) $ (5,725) $ (5,868) $ (3,300) $ (5,868) 0.826 $ 1,302 $ 2,727 $ 1,302 $ (4,150) $ - $ (4,150) $ (4,567) $ (573) $ (4,567) 0.751 $ 3,118 $ 2,367 $ 3,118 $ - $ 3,150 $ - $ (1,449) $ 1,794 $ (1,449) 0.683 $ - $ 2,835 $ 4,986 $ - $ 7,300 $ 7,300 $ (1,449) $ 4,628 $ 3,537 Payback period 3.00 2.00 3.00 Years Years Years Discounted payback period 0.00 2.24 3.29 Years Years Years =2+573/2367 =3+1449/4986 Using payback period Using discounted payback period Project B Project B, C

Please rate thumbs up