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. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Expected cash flow Cumulative cash flow Conventional payback period: Cash flow Discounted cash flow Cumulative discounted cash flow Discounted payback period: Year 0 -$4,500,000 O The regular payback period years $ The conventional payback period ignores the time value of money, and this concerns Cute Camel's CFO. He has now asked you to compute Alpha's discounted payback period, assuming the compa has a of capital. omplete the following table a d perform any necessary calculations. Round the discounted cash flow values to the nearest whole dollar, and the discounted payback period to two decimal places. For full credit, complete the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.) Year 0 -$4,500,000 Year 1 $1,800,000 years $ Year 2 $3,825,000 Year 1 $1,800,000 S Year 3 $1,575,000 Year 2 $3,825,000 $ Year 3 $1,575,000 Which version of a project's payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority?
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. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Expected cash flow Cumulative cash flow Conventional payback period: Cash flow Discounted cash flow Cumulative discounted cash flow Discounted payback period: Year 0 -$4,500,000 O The regular payback period years $ The conventional payback period ignores the time value of money, and this concerns Cute Camel's CFO. He has now asked you to compute Alpha's discounted payback period, assuming the compa has a of capital. omplete the following table a d perform any necessary calculations. Round the discounted cash flow values to the nearest whole dollar, and the discounted payback period to two decimal places. For full credit, complete the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.) Year 0 -$4,500,000 Year 1 $1,800,000 years $ Year 2 $3,825,000 Year 1 $1,800,000 S Year 3 $1,575,000 Year 2 $3,825,000 $ Year 3 $1,575,000 Which version of a project's payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
solve these 2 pratice problems
Transcribed Image Text:The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions.
Consider the case of Cute Camel Woodcraft Company:
Cute Camel Woodcraft Company is a small firm, and several of its managers are worried about how soon the firm will be able to recover
its initial investment from Project Alpha's expected future cash flows. To answer this question, Cute Camel's CFO has asked that you
compute the project's payback period using the following expected net cash flows and assuming that the cash flows are received evenly
throughout each year.
Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. (Note: Round the
conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.)
Expected cash flow
Cumulative cash flow
Conventional payback period:
|$
Cash flow
Discounted cash flow
Cumulative discounted cash flow
Discounted payback period:
Year 0
-$4,500,000
O The regular payback period
years
Year 0
-$4,500,000
$
$
$
years
Year 1
$1,800,000
The conventional payback period ignores the time value of money, and this concerns Cute Camel's CFO. He has now asked you to compute Alpha's
discounted payback period, assuming the company has a 8% 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 two decimal places. For full credit, complete
the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.)
$
$
$
Year 1
$1,800,000
Year 2
$3,825,000
$
$
$
Year 2
$3,825,000
Year 3
$1,575,000
$
$
Year 3
$1,575,000
Which version of a project's payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority?
Transcribed Image Text:Cash flow
Discounted cash flow
Cumulative discounted cash flow
Discounted payback period:
$
$
Year 0
-$4,500,000
O The regular payback period
O The discounted payback period
O $1,250,286
O $1,696,274
O $4,529,607
years
O $2,916,953
|$
$
Year 1
$1,800,000
$
Year 2
$3,825,000
Which version of a project's payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority?
$
$
Year 3
$1,575,000
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 in this example does the discounted payback period method fail to recognize due to this theoretical deficiency?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 6 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education