# 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?

https://brainmass.com/business/capital-budgeting/payback-period-and-npv-196333

#### 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