Green Caterpillar Garden Supplies 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, Green Caterpillar'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 by computing the project's conventional payback period. (Hint: For full credit, complete the entire table. Round the onventional payback period to the nearest two decimal places. If your answer is negative use a minus sign.) Expected cash flow Cumulative cash flow Year 0 -$5,000,000 $ Year 1 $2,000,000 Year 2 $4,250,000 Year 3 $1,750,000 Conventional payback period: years The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to compute Alpha's discounted payback period, assuming the company has a 10% cost of capital. Complete the following table and perform any necessary calculations. (Hint: Round the discounted cash flow values to the nearest whole dollar, and Che discounted payback period to the nearest two decimal places. For full credit, complete the entire table. If your answer is negative use a minus sign.) Cash flow Year 0 -$5,000,000 Discounted cash flow $ Cumulative discounted cash flow $ Discounted payback period: years Year 1 $2,000,000 Year 2 $4,250,000 $ Year 3 $1,750,000 Which version of a project's payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority? O The discounted payback period O 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? O $1,645,380 O $3,132,983 O $4,827,198 O $1,314,801

Green Caterpillar Garden Supplies 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, Green Caterpillar'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 by computing the project's conventional payback period. (Hint: For full credit, complete the entire table. Round the onventional payback period to the nearest two decimal places. If your answer is negative use a minus sign.) Expected cash flow Cumulative cash flow Year 0 -$5,000,000 $ Year 1 $2,000,000 Year 2 $4,250,000 Year 3 $1,750,000 Conventional payback period: years The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to compute Alpha's discounted payback period, assuming the company has a 10% cost of capital. Complete the following table and perform any necessary calculations. (Hint: Round the discounted cash flow values to the nearest whole dollar, and Che discounted payback period to the nearest two decimal places. For full credit, complete the entire table. If your answer is negative use a minus sign.) Cash flow Year 0 -$5,000,000 Discounted cash flow $ Cumulative discounted cash flow $ Discounted payback period: years Year 1 $2,000,000 Year 2 $4,250,000 $ Year 3 $1,750,000 Which version of a project's payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority? O The discounted payback period O 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? O $1,645,380 O $3,132,983 O $4,827,198 O $1,314,801

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 8Q

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