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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.

## 2 Answers