Greystone, Inc., has the following mutually exclusive projects. a. Suppose the companys payback period cutoff is two
Question:
Greystone, Inc., has the following mutually exclusive projects.
a. Suppose the company’s payback period cutoff is two years. Which of these two projects should be chosen?
b. Suppose the company uses the NPV rule to rank these two projects. Which project should be chosen if the appropriate discount rate is 15 percent?
Year Project A Project B -$30,600 -$21,400 15,400 10,600 2 15,600 8,600 6,200 9,600 1, 3.
Step by Step Answer:
a The payback period is the time that it takes for the cumulative undiscounted cash inflows to equal ...View the full answer
Corporate Finance Core Principles And Applications
ISBN: 9781260571127
6th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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