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?

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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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?
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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