The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $325,000 Year 2 $450,000 Year 3 $475,000 Year 4 $425,000 Q1. If the project’s weighted average cost of capital (WACC) is 8%, the project’s NPV (rounded to the nearest dollar) is: a. $381,870 b. $363,686 c. $327,317 d. $309,133 Q2. Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. a. The payback period is calculated using net income instead of cash flows. b. The payback period does not take the time value of money into account. c. The payback period does not take the project’s entire life into account.
The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years. Year Cash Flow Year 1 $325,000 Year 2 $450,000 Year 3 $475,000 Year 4 $425,000 Q1. If the project’s weighted average cost of capital (WACC) is 8%, the project’s NPV (rounded to the nearest dollar) is: a. $381,870 b. $363,686 c. $327,317 d. $309,133 Q2. Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. a. The payback period is calculated using net income instead of cash flows. b. The payback period does not take the time value of money into account. c. The payback period does not take the project’s entire life into account.
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 15E
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The NPV and payback period
What information does the payback period provide?
Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project’s net present value (NPV). You don’t know the project’s initial cost, but you do know the project’s regular, or conventional, payback period is 2.50 years.
|
Year
|
Cash Flow
|
|---|---|
| Year 1 | $325,000 |
| Year 2 | $450,000 |
| Year 3 | $475,000 |
| Year 4 | $425,000 |
Q1. If the project’s weighted average cost of capital (WACC) is 8%, the project’s NPV (rounded to the nearest dollar) is:
a. $381,870
b. $363,686
c. $327,317
d. $309,133
Q2. Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply.
a. The payback period is calculated using net income instead of cash flows.
b. The payback period does not take the time value of money into account.
c. The payback period does not take the project’s entire life into account.
Please provide the correct solutions. Thank you!
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