Consider the following projects: Consider the following projects Cash Flows ($)
ID: 1170309 • Letter: C
Question
Consider the following projects:
Consider the following projects Cash Flows ($) Project Co -2,900 -5,800 -7,250 C5 2,900 2,900 2,900 2,900 2,500 0 2,900 2,900 5,900 2,900 2,900 a. If the opportunity cost of capital is 9%, which project(s) have a positive NPV? Positive NPV project(s) Project A Project B Project C Projects A and B Projects A and C Projects B and C Projects A, B, and C No project b. Calculate the payback period for each project: (Round your answers to 2 decimal places. If a project never pays back, enter "O".) Project A Project B Project C year(s) year(s) year(s) c. Which project(s) would a firm using the payback rule accept if the cutoff period were three years? Project(s) accepted d. Calculate the discounted payback for each project. (Do not round intermediate calculations. Round your answers to 2 decimal places. If a project never pays back, enter "O".) (Click to select) Project A Project B Project C year(s) year(s) year(s) e. Which project(s) would a firm using the discounted payback rule accept if the cutoff period were three years? Project(s) accepted Click to select)Explanation / Answer
Solution:- Cash flow of Present value of Years Project -A Project -B Project -C PVF -@9% Project -A Project -B Project -C A B C D E F=B*E G=C*E H=D*E 0 -$2,900 -$5,800 -$7,250 1 -$2,900.00 -$5,800.00 -$7,250.00 1 $2,900 $2,900 $2,900 0.917431193 $2,660.55 $2,660.55 $2,660.55 2 $0 $2,900 $2,500 0.841679993 $0.00 $2,440.87 $2,104.20 3 $0 $5,900 $0 0.77218348 $0.00 $4,555.88 $0.00 4 $0 $2,900 $2,900 0.708425211 $0.00 $2,054.43 $2,054.43 5 $0 $2,900 $2,900 0.649931386 $0.00 $1,884.80 $1,884.80 NPV -$239.45 $7,796.54 $1,453.98 Note:- NPV= PV of inflows -Pv of outflows a) Hence project B and project C has positive NPV. B) Pay back peroid:- is the peroid during which outflow amount would be recovered from future inflows. Payback peroid for Project A Recovery in 1 year =2900, hence pay back peroid = 1 year Project B Recovery in 2 year = (2900+2900=5800), hence pay back peroid - 2 year . Project C Recovery in 3 year = 5400 Recovery In 4 year = 8300 Recovery required =7250. Now, Pay back peroid = 3 years+1850/2900years=3.64 years c) Firm A and B would be selected, if cutoff payback peroid is 3 years. d) Discounted pay back perod:-Peroid during which PV of outflows will be recovered from PV of inflows. Fo r project A:- Investment is never recovered. For ProjectB:- Recovered in 2 years= 5101.42 Recovered in 3 years= 9657.30 recovery required= 5800 Discounted pay back peroid = 2 years +698.58/4555.88years =2.15 years For project C:- Recovered in 4 years = 6818 Recovered in 5 years = 8702.8 recovery required =7250 Discounted pay back peroid = 4 years+432/1884.80 years= 4.23 years e) Only project B should be acccepted. Please feel free to ask if you have any query in the comment section.