Chapter 5: NPV and Other Investment Criteria

1. Given the following projects:

Project CF0 CF1 CF2 CF3 CF4

A (5,000) 1,000 1,000 3,000 -

B (1,000) - 1,000 2,000 3,000

C (5,000) 1,000 1,000 3,000 5,000

a. What is the payback period of each project?

A = 3 years, B = 2 years, C = 3 years

b. Given that you wish to use the payback rule with a cut-off period of two years, which
projects would you accept?

c. If you use cut-off period of 3 years, which projects have positive NPVs?

A, B, and C

7. Suppose you have the following investment opportunities, but only $90,000 available for
investment, which project should you take?

Project NPV Investment

1 5,000 10,000

2 5,000 5,000

3 10,000 90,000

4 15,000 60,000

5 15,000 75,000

6 3,000 15,000

1, 2, 4, and 6
8. Consider the following projects:

Project CF0 CF1 CF2 CF3 CF4 CF5

A (1,000) 1,000 - - - -

B (2,000) 1,000 1,000 4,000 1,000 1,000

C (3,000) 1,000 1,000 - 1,000 1,000

a. If the opportunity cost of capital is 10%, which projects have a positive NPV?

$1000
NPVA   $1000   $90.91
(1.10)

$1000 $1000 $4000 $1000 $1000

NPVB   $2000   2
 3
 4
  $4,044.73
(1.10) (1.10) (1.10) (1.10) (1.10) 5

$1000 $1000 $1000 $1000

NPVC   $3000   2
   $39.47
(1.10) (1.10) (1.10) 4 (1.10)5

b. Calculate the payback period for each project.

Payback A = 1 year
Payback B = 2 years

Payback C = 4 years

c. Which project(s) would a firm using the payback rule accept if the cutoff
period were 3 years?
A and B