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Please answer the following questions in detail, provide examples whenever applicable, provide in-text citations. (TABLE IMAGE ATTACHED) What is the payback period on each of the above projects? Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? If you use a cutoff period of three years, which projects would you accept

Please answer the following questions in detail, provide examples whenever applicable, provide in-text citations. (TABLE IMAGE ATTACHED) What is the payback period on each of the above projects? Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? If you use a cutoff period of three years, which projects would you accept

Essentials Of Investments
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
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Please answer the following questions in detail, provide examples whenever applicable, provide in-text citations.

(TABLE IMAGE ATTACHED)

  1. What is the payback period on each of the above projects?
  2. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept?
  3. If you use a cutoff period of three years, which projects would you accept?
  4. If the opportunity cost of capital is 10%, which projects have positive NPVs?
  5. If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” True or false?
  6. If the firm uses the discounted-payback rule, will it accept any negative-NPV projects? Will it turn down any positive NPV projects?
### Cash Flows Table The table below represents the cash flows for three different projects, labeled A, B, and C. These cash flows are represented for five distinct time periods, labeled \( C_0 \) through \( C_4 \). #### Table of Cash Flows (\$) | Project | \( C_0 \) | \( C_1 \) | \( C_2 \) | \( C_3 \) | \( C_4 \) | |---------|----------|----------|----------|----------|----------| | A | \(-5,000\) | \(+1,000\) | \(+1,000\) | \(+3,000\) | \(0\) | | B | \(-1,000\) | \(0\) | \(+1,000\) | \(+2,000\) | \(+3,000\) | | C | \(-5,000\) | \(+1,000\) | \(+1,000\) | \(+3,000\) | \(+5,000\) | #### Explanation - **\( C_0 \):** This represents the initial cash outflow at the start of the project. - **\( C_1 \) to \( C_4 \):** These are the cash inflows or outflows in subsequent periods. **Project A:** - Initial investment of \$5,000. - Returns \$1,000 in both years 1 and 2. - Returns \$3,000 in year 3 and zero in year 4. **Project B:** - Initial investment of \$1,000. - No return in year 1. - Returns \$1,000 in year 2, \$2,000 in year 3, and \$3,000 in year 4. **Project C:** - Initial investment identical to Project A at \$5,000. - Returns are the same as Project A until year 3. - Additional \$5,000 return in year 4. This table can be used to analyze the cash flow patterns and potential profitability of these projects over a specified time period.
Transcribed Image Text:### Cash Flows Table The table below represents the cash flows for three different projects, labeled A, B, and C. These cash flows are represented for five distinct time periods, labeled \( C_0 \) through \( C_4 \). #### Table of Cash Flows (\$) | Project | \( C_0 \) | \( C_1 \) | \( C_2 \) | \( C_3 \) | \( C_4 \) | |---------|----------|----------|----------|----------|----------| | A | \(-5,000\) | \(+1,000\) | \(+1,000\) | \(+3,000\) | \(0\) | | B | \(-1,000\) | \(0\) | \(+1,000\) | \(+2,000\) | \(+3,000\) | | C | \(-5,000\) | \(+1,000\) | \(+1,000\) | \(+3,000\) | \(+5,000\) | #### Explanation - **\( C_0 \):** This represents the initial cash outflow at the start of the project. - **\( C_1 \) to \( C_4 \):** These are the cash inflows or outflows in subsequent periods. **Project A:** - Initial investment of \$5,000. - Returns \$1,000 in both years 1 and 2. - Returns \$3,000 in year 3 and zero in year 4. **Project B:** - Initial investment of \$1,000. - No return in year 1. - Returns \$1,000 in year 2, \$2,000 in year 3, and \$3,000 in year 4. **Project C:** - Initial investment identical to Project A at \$5,000. - Returns are the same as Project A until year 3. - Additional \$5,000 return in year 4. This table can be used to analyze the cash flow patterns and potential profitability of these projects over a specified time period.
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4. If the opportunity cost of capital is 10%, which projects have positive NPVs? How do you know?

5. “If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” Is this statement true or false? How do you know? 

6. If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know? 

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  1. What is the payback period on each of the above projects?
  2. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? Why?
  3. If you use a cutoff period of three years, which projects would you accept? Why?
  4. If the opportunity cost of capital is 10%, which projects have positive NPVs? How do you know?
  5. “If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” Is this statement true or false? How do you know? 
  6. If the firm uses the discounted-payback rule, will it accept any negative NPV projects? Will it turn down any positive NPV projects? How do you know?  
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