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# Payback period and NPV

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?

#### 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

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