Calculation of Payback Period and NPV
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What is the payback period on each of the following projects?
project time 0 1 3 4
a -5000 1000 1000 3000 0
b -1000 0 1000 2000 3000
c -5000 1000 1000 3000 5000
Given that you wish to use the payback rule with a cutoff period of 2 years, which project would you accept?
If you ue a cutoff period of 3 years, which projects would accept?
If the opportunity cost of capital is 10%, which projects have positive NPV's?
True or false does payback gives too much weight to cash flows that occur after the cutoff date?
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Solution Summary
The solution illustrates steps required for the calculation of NPV and Payback period.
Solution Preview
The attached Excel file contains the answers to the 4 questions.
What is the payback period on each of the following projects?
Project a
Year Cash flow Cumulative cash flow
0 -5000 (5,000)
1 1000 (4,000)
2 1000 (3,000)
3 3000 0 Payback period= 3 years
4 0
0
Payback period of Project a 3 years
Project b
Year Cash flow Cumulative cash flow
0 -1000 (1,000)
1 0 (1,000)
2 1000 0 Payback period= 2 years
3 2000 2,000
4 3000
5000
Payback period of Project ...
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