Problem:
The cash flow for projects A, B, C are given below:
Year ProjectA ProjectB ProjectC
0 -1000 -1000 -1000
1 0 1000 0
2 2000 0 0
3 -1000 1000 3000
(a) Calculate the payback period and net present value for each project (assuming a 10% discount rate).
(b) If A and B are mutually exclusive and C is independent, which project, or combination of projects, is preferred using (1) the payback method or (2) the net present value method? What does the result tell you about the value-additivity properties of the payback method?