Calculate the payback period of each investment

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Reference no: EM131328784

The cash flows associated with three different projects are as follows:

Cash Flows	Alpha ($ in millions)	Beta ($ in millions)	Gamma ($ in millions)
Initial Outflow	-1.5	-0.4	-7.5
Year 1	0.3	0.1	2
Year 2	0.5	0.2	3
Year 3	0.5	0.2	2
Year 4	0.4	0.1	1.5
Year 5	0.3	-0.2	5.5

a. Calculate the payback period of each investment.

b. Which investments does the firm accept if the cutoff payback period is three years? Four years?

c. If the firm invests by choosing projects with the shortest payback period, which project would it invest in?

d. If the firm uses discounted payback with a 15 percent discount rate and a four-year cutoff period, which projects will it accept?

e. One of these almost certainly should be rejected, but may be accepted if the firm uses payback analysis. Which one?

f. One of these projects almost certainly should be accepted (unless the firm's opportunity cost of capital is very high), but may be rejected if the firm uses payback analysis. Which one?

Reference no: EM131328784

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