a. What is the payback period on each of the following projects?
Cash flows($) | |||||
Project | C0 | C1 | C2 | C3 | C4 |
A | -5,000 | +1,000 | + 1,000 | +3,000 | 0 |
B | -1,000 | 0 | +1,000 | +2,000 | +3,000 |
C | -5,000 | + 1,000 | +1,000 | +3,000 | +5,000 |
b. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept?
c. If you use a cutoff period of three years, which projects would you accept?
d. If the opportunity cost of capital is 10%, which projects have positive NPVs?
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?
f. If the firm uses the discounted-payback rule, will it accept any negative-NPV projects? Will it turn down positive-NPV projects? Explain.
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