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Complete the following table and compute the project’s conventional payback period
Complete the following table and compute the project’s conventional payback period. Round the payback period to the nearest two decimal places. Be sure to complete the entire table—even if the values exceed the point at which the cost of the project is recovered.
|
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: |
years |
The conventional payback period ignores the time value of money, and this concerns Fuzzy Button’s CFO. He has now asked you to compute Alpha’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. Again, be sure to complete the entire table—even if the values exceed the point at which the cost of the project is recovered.
Again, be sure to complete the entire table—even if the values exceed the point at which the cost of the project is recovered.
|
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: |
years |
Which version of a project’s payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority?
The regular payback period
OR
The discounted payback period
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