Hi all, Can someone please answer this CASH FLOW question. Thank you. Consider the following information: Cash Flows ($) Project C0 C1 C2 C3 C4 A –5,500 1,500 1,500 3,500 0 B –500 0 400 2,500 3,500 C 3,800 500 3,100 1,000 500 a. What is...

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Finance

Hi all,
Can someone pleaseanswer this CASH FLOW question. Thank you.
Consider the followinginformation:
Cash Flows ($)
Project C₀ C₁ C₂ C₃ C₄
A –5,500 1,500 1,500 3,500 0
B –500 0 400 2,500 3,500
C 3,800 500 3,100 1,000 500
a.What is the payback period on each of the above projects?(Round your answers to 2 decimal places.)
Project PaybackPeriod
A year(s)
B year(s)
C year(s)
b.Given that you wish to use the payback rule with a cutoff period oftwo years, which projects would you accept?
ProjectB
None
ProjectC
ProjectA, Project B, and Project C
ProjectA and Project C
ProjectA and Project B
ProjectB and Project C
ProjectA
c. Ifyou use a cutoff period of three years, which projects would youaccept?
ProjectB
ProjectA and Project C
ProjectA, Project B, and Project C
ProjectC
ProjectA and Project B
ProjectA
ProjectB and Project C
d. Ifthe opportunity cost of capital is 10%, which projects havepositive NPVs?
ProjectA, Project B, and Project C
ProjectA
ProjectA and Project C
ProjectB
ProjectA and Project B
ProjectC
ProjectB and Project C
e.“If a firm uses a single cutoff period for all projects, it islikely to accept too many short-lived projects.” True or false?
True
False
f-1.If the firm uses the discounted-payback rule, will it accept anynegative-NPV projects?
Yes
No
f-2.Will it turn down positive-NPV projects?
Yes
No

Answer & Explanation Solved by verified expert

3.9 Ratings (480 Votes)

Year	0	1	2	3	4
Cash Flow A	-5500	1500	1500	3500	0
Cumulative Cash flow	-5500	-4000	-2500	1000	1000
Payback Period	2.71	(2+2500/3500)

Year	0	1	2	3	4
Cash Flow B	-500	0	400	2500	3,500
Cumulative Cash flow	-500	-500	-100	2400	5900
Payback Period	2.04	(2+100/2500)


Year	0	1	2	3	4
Cash Flow C	-3800	500	3100	1000	500
Cumulative Cash flow	-3800	-3300	-200	800	1300
Payback Period	2.20	(2+200/1000)

b. Option None because payback period is more than cut off period

c. Option c . Project A,B,C payback period is less than cut off period.

d. NPV of A =PV of Cash flows - Investment =1500/(1+10%)+1500/(1+10%)^2+3500/(1+10%)^3-5500 = -267.09
NPV of B =PV of Cash flows - Investment =0/(1+10%)+400/(1+10%)^2+2500/(1+10%)^3+3500/(1+10%)^4-500 = 4099.41
NPV of C =PV of Cash flows - Investment=500/(1+10%)+3100/(1+10%)^2+1000/(1+10%)^3+500/(1+10%)^4-3800=309.35
Last option project B and C
e. True,

f. Yes. Because it fails to include cash flows after payback period which might be negative.

g.Yes.In case cash flows are positive after the payback period

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Transcribed Image Text

Hi all,Can someone pleaseanswer this CASH FLOW question. Thank you.Consider the followinginformation:Cash Flows ($)ProjectC0C1C2C3C4A–5,5001,5001,5003,5000B–50004002,5003,500C3,8005003,1001,000500a.What is the payback period on each of the above projects?(Round your answers to 2 decimal places.)ProjectPaybackPeriodAyear(s)Byear(s)Cyear(s)b.Given that you wish to use the payback rule with a cutoff period oftwo years, which projects would you accept?ProjectBNoneProjectCProjectA, Project B, and Project CProjectA and Project CProjectA and Project BProjectB and Project CProjectAc. Ifyou use a cutoff period of three years, which projects would youaccept?ProjectBProjectA and Project CProjectA, Project B, and Project CProjectCProjectA and Project BProjectAProjectB and Project Cd. Ifthe opportunity cost of capital is 10%, which projects havepositive NPVs?ProjectA, Project B, and Project CProjectAProjectA and Project CProjectBProjectA and Project BProjectCProjectB and Project Ce.“If a firm uses a single cutoff period for all projects, it islikely to accept too many short-lived projects.” True or false?TrueFalsef-1.If the firm uses the discounted-payback rule, will it accept anynegative-NPV projects?YesNof-2.Will it turn down positive-NPV projects?YesNo

	Cash Flows ($)
Project	C₀	C₁	C₂	C₃	C₄
A	–5,500	1,500	1,500	3,500	0
B	–500	0	400	2,500	3,500
C	3,800	500	3,100	1,000	500

	ProjectB
	None
	ProjectC
	ProjectA, Project B, and Project C
	ProjectA and Project C
	ProjectA and Project B
	ProjectB and Project C
	ProjectA