11 Jan Use the payback decision
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.
Time
0
1
2
3
4
5
6
Cash Flow
-1,070
100
500
700
700
300
700
Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
$1,019.57, accept
$2,089.57, accept
$926.88, accept
$-303.12, reject
Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?
accept A, reject B
accept both A and B
reject A, accept B
accept neither A nor B
Compute the NPV for Project X with the cash flows shown below if the appropriate cost of capital is 11 percent.
Time:
0
1
2
3
4
5
Cash flow:
-140
-140
0
230
205
180
$143.91
$205.35
$410.04
$129.65
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 11 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
Time:
0
1
2
3
Project A Cash Flow
-33,000
23,000
43,000
14,000
Project B Cash Flow
-43,000
23,000
33,000
63,000
Use the discounted payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?
accept A, reject B
accept neither A nor B
reject A, accept B
accept both A and B
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.
Time
0
1
2
3
4
5
6
Cash Flow
-820
150
490
690
690
290
690
Use the PI decision rule to evaluate this project; should it be accepted or rejected?
-140.00%, reject
1.40%, accept
1.40%, reject
140.04%, accept
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 14 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.
Time
0
1
2
3
4
5
6
Cash Flow
-960
160
440
640
640
240
640
Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?
2.76 years, accept
2.87 years, accept
3.15 years, reject
3.13 years, reject
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
Time:
0
1
2
3
Project A Cash Flow
-20,000
10,000
30,000
1,000
Project B Cash Flow
-30,000
10,000
20,000
50,000
Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?
rev: 12_04_2012
accept neither A nor B
accept both A and B
reject A, accept B
accept A, reject B
Compute the Discounted Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 13 percent and the maximum allowable discounted payback is 3 years.
Time:
0
1
2
3
4
5
Cash flow:
-970
470
510
430
330
180
3.08 years, reject
3.52 years, reject
5.08 years, reject
2.52 years, accept
Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 8 percent.
Time:
0
1
2
3
4
5
Cash flow:
-82
-82
0
107
82
57
44.28%, accept
8.00%, reject
31.80%, accept
26.08%, accept
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.
Time
0
1
2
3
4
5
6
Cash Flow
-980
180
420
620
620
220
620
Use the payback decision rule to evaluate this project; should it be accepted or rejected?
4.00 years, reject
2.61 years, reject
1.29 years, accept
0 years, accept
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