Senior management asks you to recommend a decision on which project(s) to accept based on the...

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Finance

Senior management asks you to recommend a decision on whichproject(s) to accept based on the cash flow forecasts provided.Thefirm uses a 3-year cutoff when using the payback method. The hurdlerate used to evaluate capital budgeting projects is 15%.
Assume the projects are independent and answer thefollowing:
Calculate the payback period for each project.
Which project(s) would you accept based on the paybackcriterion?
Calculate the internal rate of return (IRR) for eachproject.
Which projects would you accept based on the IRRcriterion?
Calculate the net present value (NPV) for each project.
Which projects would you accept based on the NPV criterion
Project A
Project B
Project C
Year 0
-30,000
-20,000
-50,000
Year 1
0
4,000
20,000
Year 2
7,000
5,000
20,000
Year 3
20,000
6,000
20,000
Year 4
20,000
7,000
5,000
Year 5
10,000
8,000
5,000
Year 6
5,000
9,000
5,000

Answer & Explanation Solved by verified expert

4.5 Ratings (980 Votes)

aPayback periodfull years until recovery unrecovered cost at the start of the yearcash flow during the year Project A Payback period 3 years 3000 20000 3 years 015 315 years Project B Payback period 3 years 5000 7000 3 years 071 371 years Project C Payback period 2 years 10000 20000 2 years 050 250 years I would recommend project C using the payback criterion since only its payback is lesser than the 3year cutoff bProject A Internal rate of return is calculated using a financial calculator by inputting the below Press the CF button CF0 30000 It is entered with a negative sign since it is a cash outflow Cash flow for each year should be entered Press Enter and down arrow after inputting each See Answer

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Transcribed Image Text

Senior management asks you to recommend a decision on whichproject(s) to accept based on the cash flow forecasts provided.Thefirm uses a 3-year cutoff when using the payback method. The hurdlerate used to evaluate capital budgeting projects is 15%.Assume the projects are independent and answer thefollowing:Calculate the payback period for each project.Which project(s) would you accept based on the paybackcriterion?Calculate the internal rate of return (IRR) for eachproject.Which projects would you accept based on the IRRcriterion?Calculate the net present value (NPV) for each project.Which projects would you accept based on the NPV criterionProject AProject BProject CYear 0-30,000-20,000-50,000Year 104,00020,000Year 27,0005,00020,000Year 320,0006,00020,000Year 420,0007,0005,000Year 510,0008,0005,000Year 65,0009,0005,000

	Project A	Project B	Project C
Year 0	-30,000	-20,000	-50,000
Year 1	0	4,000	20,000
Year 2	7,000	5,000	20,000
Year 3	20,000	6,000	20,000
Year 4	20,000	7,000	5,000
Year 5	10,000	8,000	5,000
Year 6	5,000	9,000	5,000