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The ABC Company has three investment projects for next year but does not want to...

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Finance

The ABC Company has three investment projects for next year but does not want to make any investment that requires more than three years to recover the firm's initial investment. The cash flows for the three projects (Project A, project B and project C) are as follows:

Year Project A Project B Project C

0 -$800 -$10,000 -$4,000

1 $400 $4,000 $1,000

2 $300 $3,000 $1,000

3 $250 $5,000 $2,000

4 $100 $3,000 $2,000

5 $500 $3,000 $2,000

a. Given ABC's three-year payback period, which of the projects will quality for acceptance? Which project looks the best using this criterion? (5 marks)

b. Rank the three projects using their profitability index? Which project looks the best using this criterion? (5 marks)

c. If ABC uses a 10% discount rate to analyse capital projects, what is the discounted payback period for each of the three projects? If the firm still maintains its three-year payback policy for the discounted payback, which projects should the firm undertake? (5 marks)

d. What is the net present value (NPV) for each of the three projects? Rank the three projects using their NPV? Which project looks the best using this criterion? (5 marks)

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