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

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Finance

Task:
Senior management asks you to recommend a decision on whichproject(s) to accept based on the cash flow forecasts provided.
Relevant information:
The firm uses a 3-year cutoff when using the paybackmethod.
The hurdle rate used to evaluate capital budgeting projects is15%.
The cash flows for projects A, B and C are provided below.
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
Assume the projects are mutually exclusive and answerthe following:
Which project(s) would you accept based on the paybackcriterion?
Which projects would you accept based on the IRRcriterion?
Which projects would you accept based on the NPVcriterion?

Answer & Explanation Solved by verified expert

4.2 Ratings (567 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

Task:Senior management asks you to recommend a decision on whichproject(s) to accept based on the cash flow forecasts provided.Relevant information:The firm uses a 3-year cutoff when using the paybackmethod.The hurdle rate used to evaluate capital budgeting projects is15%.The cash flows for projects A, B and C are provided below.Project 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 65,0009,0005,000Assume the projects are mutually exclusive and answerthe following:Which project(s) would you accept based on the paybackcriterion?Which projects would you accept based on the IRRcriterion?Which projects would you accept based on the NPVcriterion?

	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