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

Cash Flows ($)

Project C0 C1 C2 C3 C4 A 5,000 1,000 1,000 3,000 0 B 1,000 0 1,000 2,000 3,000 C 5,000 1,000 1,000 3,000 5,000 PROBLEM SETS Visit us at www.mhhe.com/bma Chapter 5 Net Present Value and Other Investment Criteria 121

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 shortlived projects.” True or false?

f. If the firm uses the discounted-payback rule, will it accept any negative-NPV projects?

Will it turn down positive-NPV projects? Explain.

AppendixLO1