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    Payback period and NPV

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    The cash flow for projects A, B, C are given below:
    Year ProjectA ProjectB ProjectC
    0 -1000 -1000 -1000
    1 0 1000 0
    2 2000 0 0
    3 -1000 1000 3000

    (a) Calculate the payback period and net present value for each project (assuming a 10% discount rate).
    (b) If A and B are mutually exclusive and C is independent, which project, or combination of projects, is preferred using (1) the payback method or (
    2) the net present value method? What does the result tell you about the value-additivity properties of the payback method?

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    Solution Preview

    (a) Calculate the payback period and net present value for each project (assuming a 10% discount rate).
    (b) If A and B are mutually exclusive and C is independent, which project, or combination of projects, is preferred using (1) the payback method or (
    2) the net present value method? What does the result tell you about the value-additive properties of the payback method?

    Investment decision rules are usually referred to as capital budgeting techniques.
    According to Copeland and Weston (1992: 26) the best technique will possess the following essential property: It will maximize shareholder's wealth. This essential property can be broken down into separate criteria:
    - All cash flows must be considered.
    - The cash flows should be discounted at the opportunity cost of funds.
    - The techniques should ...

    Solution Summary

    This explains the steps to compute the payback period and NPV

    $2.19

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