MBA $643$

Week $2$: Capital Budgeting $$ Decision Rules

Question $1$

Cash Flows $($$$)$

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

A $-50001000100030000$

B $-10000100020003000$

C $-50001000100030005000$

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

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 cost of capital is $10\%,$ which projects have a positive NPV$?$

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