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Task:
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 |
- 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?
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