How do you calculate payback and NPV?
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Payback and NPV.
a. What is the payback period on each of the following projects?
Project A
Project B
Project C
b. Given that you wish to use the payback rule with a cutoff period of 2 years, which projects would you accept?
c. If you use a cutoff period of 3 years, which projects would you accept?
d. If the opportunity cost of capital is 10 percent, which projects have positive NPVs?
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Solution Summary
The solution explains how to calculate the payback and NPV for a project and determine if the project is acceptable.
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a. What is the payback period on each of the following projects?
Payback is the time taken to recover the initial investment. The cash flows for the projects are
Project A -5,000 1,000 1,000 3,000
Project B -1,000 0 1,000 2,000 3,000
Project C -5,000 1,000 1,000 3,000 5,000
For project A to recover 5,000, it will take all the ...
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