Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided. Relevant information: The firm uses a 3-year cutoff when using the payback method. The hurdle rate used to evaluate capital budgeting projects is 15%. The cash flows for projects A, B and C are provided below. Project A Project B Project C Year 0 -30,000 -20,000 -50,000 Year 1 0 4,000 20,000 Year 2 7,000 5,000 20,000 Year 3 20,000 6,000 20,000 Year 4 20,000 7,000 5,000 Year 5 10,000 8,000 5,000 Year 6 5,000 9,000 5,000 Calculate the payback period for each project. Which project(s) would you accept based on the payback criterion?
Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided. Relevant information: The firm uses a 3-year cutoff when using the payback method. The hurdle rate used to evaluate capital budgeting projects is 15%. The cash flows for projects A, B and C are provided below. Project A Project B Project C Year 0 -30,000 -20,000 -50,000 Year 1 0 4,000 20,000 Year 2 7,000 5,000 20,000 Year 3 20,000 6,000 20,000 Year 4 20,000 7,000 5,000 Year 5 10,000 8,000 5,000 Year 6 5,000 9,000 5,000 Calculate the payback period for each project. Which project(s) would you accept based on the payback criterion?
Financial And Managerial Accounting
15th Edition
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:WARREN, Carl S.
Chapter26: Capital Investment Analysis
Section: Chapter Questions
Problem 3CMA
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Question
Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow
Relevant information:
- The firm uses a 3-year cutoff when using the payback method.
- The hurdle rate used to evaluate capital budgeting projects is 15%.
The cash flows for projects A, B and C are provided below.
|
|
Project A |
Project B |
Project C |
|
Year 0 |
-30,000 |
-20,000 |
-50,000 |
|
Year 1 |
0 |
4,000 |
20,000 |
|
Year 2 |
7,000 |
5,000 |
20,000 |
|
Year 3 |
20,000 |
6,000 |
20,000 |
|
Year 4 |
20,000 |
7,000 |
5,000 |
|
Year 5 |
10,000 |
8,000 |
5,000 |
|
Year 6 |
5,000 |
9,000 |
5,000 |
-
- Calculate the payback period for each project.
- Which project(s) would you accept based on the payback criterion?
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