# Question 14 bm 53 as winner of a breakfast cereal

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QUESTION 14 (BM-53) As winner of a breakfast cereal competition, you can choose one of the following prizes: a. \$100,000 now. b. \$180,000 at the end of five years. c. \$11,400 a year forever. d. \$19,000 for each of 10 years. e. \$6,500 next year and increasing thereafter by 5 percent a year forever. If the interest rate is 12 percent, which is the most valuable prize? QUESTION 15 (BM-112)

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Solve the following: a. What is the payback period on each of the following projects? Cash Flows Project C 0 C 1 C 2 C 3 C 4 A –5,000 1,000 1,000 3,000 0 B –1,000 0 1,000 2,000 3,000 C –5,000 1,000 1,000 3,000 5,000 c. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? d. If you use a cutoff period of three years, which projects would you accept? e. If the opportunity cost of capital is 10 percent, which projects have positive NPVs? f. “Payback gives too much weight to cash flows that occur after the cutoff date.” True or false? g. “If a firm uses a single cutoff period for all projects, it is likely to accept too many short-lived projects.” True or false? h. If the firm uses the discounted-payback rule, will it accept any negative-NPV projects? Will it turn down positive-NPV projects? Explain.
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