Question $25$

Consider a project that requires an initial investment of $$780($at $t=0).$ The project is expected

to generate the following cash flows $($CF$)$ for the next $5$ years:

Project Cash Flow Estimates

The project has a discount rate of $11\%$ and a payback period of $2\mathrm{.}6$ years.

A$.(1$ point$)$ Calculate the net present value $($NPV$)$ of the project. Should you accept or reject the

project according to the NPV rule?

You do not need to show your calculation steps for the project NPV$.$

B$.(1$ point$)$ Suppose that your cutoff time for payback is $3$ years. Should you accept or reject

the project according to the payback period rule?

C$.(1$ point$)$ Using the results above, briefly explain why the NPV rule is superior to the payback

period rule for investment decisions.

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