Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Cute Camel Woodcraft Company:
Cute Camel Woodcraft Company is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Alpha’s expected future cash flows. To answer this question, Cute Camel’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year.
Complete the following table and compute the project’s conventional payback period. Round the conventional payback period to two decimal places. For negative values, be sure to include a minus sign in your answer. For full credit, complete the entire table.
Year 0 Year 1 Year 2 Year 3 Expected cash flow -4,500,000 $1,800,000 $3,825,000 $1,575,000
Cumulative cash flow year0? year1? year2? year3?
Conventional payback period: years??
The conventional payback period ignores the
Year 0 Year 1 Year 2 Year 3 Cash flow -4,500,000 $1,800,000 $3,825,000 $1,575,000
Discounted cash flow year0? year1? year2? year3?
Cumulative discounted cash flow year0? year1? year2? year3?
Discounted payback period: years?
Which version of a project’s payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority?
The discounted payback period ?
The regular payback period?
One theoretical disadvantage of both payback methods—compared to the
How much value does the discounted payback period method fail to recognize due to this theoretical deficiency? $1,696,274 $2,916,953 $1,250,286 $4,529,607????
Thank you!
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