The Cash Flow Forecasts

Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided.
Relevant information:

1. The firm uses a 3-year cutoff when using the payback method.
2. The hurdle rate used to evaluate capital budgeting projects is 15%.
   The cash flows for projects A, B and C are provided in attachment below.
3. Assume the projects are independent and answer the following:
   --Calculate the payback period for each project.
   --Which project(s) would you accept based on the payback criterion?
   --Calculate the internal rate of return (IRR) for each project.
   --Which projects would you accept based on the IRR criterion?
   --Calculate the net present value (NPV) for each project.
   --Which projects would you accept based on the NPV criterion?
4. Assume the projects are mutually exclusive and answer the following:
   --Which project(s) would you accept based on the payback criterion?
   --Which projects would you accept based on the IRR criterion?
   --Which projects would you accept based on the NPV criterion?

Sample Solution