Here are the expected cash flows for three projects: Project Cash Flows (dollars) Year 0 Year 1 Year 2 Year 3 Year 4 A-7,000 +1,500 +1,500 +4,000 0B -3,000 0+3,000+3,000 +4,000 C-7,000+1,500 +1,500 +4,000 + 6,000 a. What is the payback period on each of the projects? b. If you use the payback rule with a cutoff period of 2 years, which projects will you accept? c. If you use a cutoff period of 3 years, which projects will you accept? d-1. If the opportunity cost of capital is 10%, calculate the NPV for projects A, B, and C. Note: Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places. d-2. Which projects have positive NPVs? e. "Payback gives too much weight to cash flows that occur after the cutoff date." True or false?
Here are the expected cash flows for three projects: Project Cash Flows (dollars) Year 0 Year 1 Year 2 Year 3 Year 4 A-7,000 +1,500 +1,500 +4,000 0B -3,000 0+3,000+3,000 +4,000 C-7,000+1,500 +1,500 +4,000 + 6,000 a. What is the payback period on each of the projects? b. If you use the payback rule with a cutoff period of 2 years, which projects will you accept? c. If you use a cutoff period of 3 years, which projects will you accept? d-1. If the opportunity cost of capital is 10%, calculate the NPV for projects A, B, and C. Note: Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places. d-2. Which projects have positive NPVs? e. "Payback gives too much weight to cash flows that occur after the cutoff date." True or false?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Here are the expected cash flows for three projects: Project Cash Flows (dollars) Year 0 Year
1 Year 2 Year 3 Year 4 A-7,000 +1,500 +1,500 +4,000 0B
-3,000 0+3,000+3,000 +4,000 C-7,000+1,500 +1,500 +4,000 + 6,000 a. What is
the payback period on each of the projects? b. If you use the payback rule with a cutoff
period of 2 years, which projects will you accept? c. If you use a cutoff period of 3 years,
which projects will you accept? d-1. If the opportunity cost of capital is 10%, calculate the
NPV for projects A, B, and C. Note: Negative amounts should be indicated by a minus sign.
Do not round intermediate calculations. Round your answers to 2 decimal places. d-2.
Which projects have positive NPVs? e. "Payback gives too much weight to cash flows that
occur after the cutoff date." True or false?
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