Cummings Products Company's cost of capital is 11.2% and the company is considering two mutually exclusive projects. In the past, it usually takes about 5 years for the company to recoup its investments from a good project. The projects' expected cash flows are as follows: Project B's payback period is
Cummings Products Company's cost of capital is 11.2% and the company is considering two mutually exclusive projects. In the past, it usually takes about 5 years for the company to recoup its investments from a good project. The projects' expected cash flows are as follows: Project B's payback period is
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Cummings Products Company's cost of capital is 11.2% and the company is considering two mutually exclusive projects. In the past, it usually takes about 5 years for the company to recoup its investments from a good project. The projects' expected cash flows are as follows:
Project B's payback period is
Transcribed Image Text:The image displays a table comparing cash flows for two projects, Project A and Project B, over a period of eight years. Each row represents a year and the corresponding cash flows for each project. Negative values, indicating an outflow of cash, are enclosed in parentheses.
**Table: Cash Flows by Year for Projects A and B**
- **Year 0:**
- Project A: $(300)
- Project B: $(405)
- **Year 1:**
- Project A: $(387)
- Project B: $134
- **Year 2:**
- Project A: $(193)
- Project B: $134
- **Year 3:**
- Project A: $100
- Project B: $234
- **Year 4:**
- Project A: $600
- Project B: $134
- **Year 5:**
- Project A: $600
- Project B: $134
- **Year 6:**
- Project A: $650
- Project B: $134
- **Year 7:**
- Project A: $50
- Project B: $0
This financial breakdown helps in analyzing the yearly performance and net cash flow impact of each project over time.
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Step 1
Payback period is period required to recover initial investment of projects.
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