Consider the following projects: Cash Flows ($) Project C0 C1 C02 C3 C4 C5 A -1,
ID: 2668050 • Letter: C
Question
Consider the following projects:Cash Flows ($)
Project C0 C1 C02 C3 C4 C5
A -1,000 +1,000 0 0 0 0
B -2,000 +1,000 +1,000 +4,000 +1,000 +1,000
C -3,000 +1,000 +1,000 0 +1,000 +1,000
a.If the opportunity cost of capital is 10 percent, which projects have a positive NPV?
b.Calculate the payback period for each project.
c.Which project(s) would a firm using the payback rule accept if the cutoff period is three years?
d. Calculate the discounted payback period for each project.
e. Which project(s) would a firm using the discounted payback rule accept if the cutoff period were three years?
Explanation / Answer
a.
A. NPV = -1,000 + 1,000/1.1 = -90.91
B. NPV = -2,000 + 1,000/1.1 + 1,000/1.1^2 + 4000/1.1^3 + 1000/1.1^4 + 1000/1.1^5 = 4044.73
C. NPV = -3000 + 1000/1.1 + 1000/1.1^2 + 1000/1.1^4 + 1000/1.1^5 = 39.47
Answer: B and C have positive NPVs.
b.
A. Payback period = 1 year.
B. Payback period = 2 years.
C. Payback period = 4 years.
c. Answer is A and B.
d.
A. Discounted payback period - Investment is never recovered.
B. 2000 – 1000/1.1 – 1000/1.1^2 = 264.46. 264.46/(4000/1.1^3) = 0.09.
Discounted payback period = 2.09 years
C. 3000 – 1000/1.1 – 1000/1.1^2 – 1000/1.1^4 =581.45. 581.45/(1000/1.1^5) = 0.94
Discounted payback period = 4.94 years
e. Answer is B.