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Comparison of NPV and Payback of Three Projects

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(Payback and NPV) Three projects have the cash flows given here. The cost of capital is 10%.
a. Calculate the paybacks for all three projects. Rank the projects from best to worst based on their paybacks.
b. Calculate the NPVs for all three projects. Rank the projects from best to worst based on their NPVs.
c. Why are these two sets of rankings different?

Year 0 1 2 3 4 5
Project 1 (-10) 4 3 2 1 5
Project 2 (-10) 1 2 3 4 5
Project 3 (-10) 4 3 2 1 10

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Solution Preview

a. Payback is the time taken to recover the initial investment.
Project 1 recovers the initial investment of $10, in 4 years and so payback period is 4 years
Project 2 the payback period is 4 years
Project 3 the payback period is ...

Solution Summary

Provides calculations necessary to do a comparison of NVP and paybacks between three separate projects.

$2.19