Exercises:

$1.$

a$.$ What is the payback period on each of the following projects?

Cash Flows $($$$)$

Project C$0$ C$1$ C$2$ C$3$ C$4$

A $-5,000+1,000+1,000+3,0000$

B $-1,0000+1,000+2,000+3,000$

C $-5,000+1,000+1,000+3,000+5,000$

b$.$ Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept?

c$.$ If you use a cutoff period of three years, which projects would you accept?

d$.$ If the opportunity cost of capital is $10\%,$ which projects have positive NPVs$?$

e$.$If a firm uses a single cutoff period for all projects, it is likely to accept too many short lived projects.$$ True or false?

f$.$ If the firm uses the discounted$-$payback rule, will it accept any negative$-$NPV projects? Will it turn down any positive$-$NPV projects?