1.

Comparing Payback Period and Discounted Payback Period – Mathew Incorporated is debating using
Payback Period versus Discounted Payback Period for small dollar projects. The Information Officer has
submitted a new computer project of P15,000 cost. The cash flows will be P5,000 each year for the next
five years. The cut-off period used by Mathew Incorporated is three years. The Information Officer states
it doesn’t matter what model the company uses for the decision, it is clearly an acceptable project.
Demonstrate for the IO that the selection of the model does matter!

2. Comparing Payback Period and Discounted Payback Period – Neilsen Incorporated is switching from
Payback Period to Discounted Payback Period for small dollar projects. The cut-off period will remain at 3
years. Given the following four projects cash flows and using a 10% discount rate, which projects that
would have been accepted under Payback Period will now be rejected under Discounted Payback Period?

Project Project
Cash Flows Project One Project Two Three Four
Initial cost P10,000 P15,000 P8,000 P18,000
Year One P4,000 P7,000 P3,000 P10,000
Year Two P4,000 P5,500 P3,500 P11,000
Year Three P4,000 P4,000 P4,000 P0

3. Net Present Value – Swanson Industries has four potential projects all with an initial cost of P2,000,000.
The capital budget for the year will only allow Swanson industries to accept one of the four projects. Given
the discount rates and the future cash flows of each project, which project should they accept?

Cash Flows Project M Project N Project O Project P

Year one P500,000 P600,000 P1,000,000 P300,000
Year two P500,000 P600,000 P800,000 P500,000
Year three P500,000 P600,000 P600,000 P700,000
Year four P500,000 P600,000 P400,000 P900,000
Year five P500,000 P600,000 P200,000 P1,100,000
Discount Rate 6% 9% 15% 22%

4. Internal Rate of Return – What are the IRRs of the four projects for Swanson Industries in problem #3?

5. Net Present Value – Campbell Industries has four potential projects all with an initial cost of P1,500,000.
The capital budget for the year will only allow Swanson industries to accept one of the four projects. Given
the discount rates and the future cash flows of each project, which project should they accept?

Cash Flows Project Q Project R Project S Project T

Year one P350,000 P400,000 P700,000 P200,000
Year two P350,000 P400,000 P600,000 P400,000
Year three P350,000 P400,000 P500,000 P600,000
Year four P350,000 P400,000 P400,000 P800,000
Year five P350,000 P400,000 P300,000 P1,000,000
Discount Rate 4% 8% 13% 18%

6. Internal Rate of Return – What are the IRRs of the four projects for Swanson Industries in problem #5?