NVP Projects Discussion Question - CLO 1, 2, 4, 5

PROJECT C0 C1 C2 C3. C4

A -5000 +1000 +1000 +3000 0

B -1000 0 +1000 +2000 +3000

C -5000 +1000 +1000 +3000 +5000

1. What is the payback period on each of the above projects?

2. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? Why?

3. If you use a cutoff period of three years, which projects would you accept? Why?

4. If the opportunity cost of capital is 10%, which projects have positive NPVs? How do you know?

5.If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects. Is this statement true or false? How do you know?

6. If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know?