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    Diaz Camera Company: Payback and NPV

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    12/6. Diaz Camera Company is considering two investments, both of which cost $10,000. The cash flows are as follows:

    Year Project A Project B
    1 . .$6,000 $5,000
    2 . . 4,000 3,000
    3 . . 3,000 8,000

    a. Which of the two projects should be chosen based on the payback method?

    b. Which of the two projects should be chosen based on the net present value method? Assume a cost of capital of 10 percent.

    c. Should a firm normally have more confidence in answer a or answer b?

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    Solution Preview

    See attached file where formatting is conserved

    a. Which of the two projects should be chosen based on the payback method?
    Payback period is the number of years in which the initial investment is recouped

    Project A
    Year Cash flow Cumulative cash flow

    0 (10,000) (10,000)
    1 6,000 (4,000)
    2 4,000 0 Payback period= 2 years
    3 3,000 3,000
    3000

    Payback period of Project ...

    Solution Summary

    Payback and NPV are calculated for comparing the two investments.

    $2.49

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