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Home/ Questions/Complete the following table and compute the project's conventional payback period.
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lyytutoria
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lyytutoriaExpert
Asked: April 13, 20222022-04-13T03:58:22+00:00 2022-04-13T03:58:22+00:00In: finance

Complete the following table and compute the project’s conventional payback period.

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Complete%20the%20following%20table%20and%20compute%20the%20project's%20conventional%20payback%20period.%20For%20full%20credit,%20complete%20the...

Complete the following table and compute the project’s conventional payback period. For full credit, complete the entire table.

Year 0 Year 1  Year 2 Year 3
Expected cash flow -5,000,000 $2,000,000 $4,250,000 $1,750,000
Cumulative cash flow
Conventional payback period:
The conventional payback period ignores the time value of money, and this concerns Blue Hamster’s CFO. He has now asked you to compute Omega’s discounted payback period, assuming the company has a 7% cost of capital. Complete the following table and perform any necessary calculations. Round the discounted cash flow values to the nearest whole dollar, and the discounted payback period to the nearest two decimal places. For full credit, complete the entire table. 
Year 0 Year 1 Year 2 Year 3
Cash flow -5,000,000 $2,000,000 $4,250,000 $1,750,000
Discounted cash flow
Cumulative discounted cash flow
Discounted payback period
Which version of a project’s payback period should the CFO use when evaluating Project Omega, given its theoretical superiority?
1, The discounted payback period
2, The regular payback period
One theoretical disadvantage of both payback methods-compared to the net present value method-is that they fail to consider the value of the cash flows beyond the point in time equal to the payback period.
How much value does the discounted payback period method fail to recognize due to this theoretical deficiency?
1, $ 1,428,521
2, $ 2,009,795
3, $ 5,140,636
4, $ 3,297,680

♦ Relevant knowledge

A payback is a rough estimate of the amount of time it takes to help an investor recuperate the cost of investing in a venture from the future cash flows. The payback period is divided into:
1, Payback time that is a standard payment period, where future cash flows aren’t altered to show their value at the moment.
2, Discounted Payback Period that takes into account the concept of time value of money concept through discounting the future flow of cah according to their current value.
discountedpayback
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    lyytutoria Expert
    2022-04-26T01:53:39+00:00Added an answer on April 26, 2022 at 1:53 am

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  2. Charlotte Davies
    2022-04-13T04:49:55+00:00Added an answer on April 13, 2022 at 4:49 am

    Complete%20the%20following%20table%20and%20compute%20the%20project's%20conventional%20payback%20period.%20For%20full%20credit,%20complete%20the...Complete%20the%20following%20table%20and%20compute%20the%20project's%20conventional%20payback%20period.%20For%20full%20credit,%20complete%20the...

    V C E 1 Year 0, Year 1 Year 2, Year 3 3 Cumulative Cash Flow (5,000,000), 4,250,000 2,500,000 3,750,000 (3,000,000), 1,250,000 4 5 Conventional Payback Period 1.7059 Years 6 7 Year 0 year 1 Year 2 years 3 9 Expected Cash Flow 10 Discounted Cash Flow 11 Cumulative Cash Flow (5,000,000), 2,500,000 4,250,000 1,428,521 1,869.159 1,428,521 1,428,521 1,428,521 1,428,273 130,841) 5,130,841) 5812,273 LC
    A B 1 year 0 year 1 year 2 years 3 3 Expected Cash Flow 3 Cumulative Cash Flow 4250000 -5000000 2000000 1750000 -B2 EV3+C2 8 Year 1 3 Year 0 2 9 10 Expected Cash Flow 10 Cumulative Cash Flow 11 A1 B9/(1+7%),A2 =C9/ (1+7%),A1 B9/ (1+7%)A0 =E9/(1)+7%)A3 =C11+C10 =C11+E11+D1012 13 Conventional Payback does not recognize value.
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