Assignment 11 - The Basics of Capital Budgeting Due Today at 1159 PM EDT Blue Ha
ID: 1172023 • Letter: A
Question
Assignment 11 - The Basics of Capital Budgeting Due Today at 1159 PM EDT Blue Hamster Manufacturing Inc. is a small firm, and several of its managers are worried about how soon the firnm will be able to recover its initial investment from Project Beta's expected future cash flows. To answer th Blue Hamsters CRO has asked that you compute the project's flows and assurming that the cash flows are received evenly throughout each year. is question, payback period using the following expected net cash Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. Year O Year 1 Year 2 Year 3 Expected cash flow Cunulative cash flow 5,500,000 $2,200,000$4,675,000 $1,925,000 Conventional payback period: The conventional payback period ignores the time value of money, and this concerns Blue Hamster's CFO. He has now asked you to compute Beta's discounted payback period, assuming the company has a 9% cost of capital. Complete the following table and perform any necessary calculations. Round the discounted cash flow values to the nearest whole collar, and the discounted payback period to the nearest two decimal places. For full credit, complete the entire table Year 0 Year 1 Year 2 Year 3 Cash flos 5500,000 $2,200,000 $4,675 000 $1,925,000Explanation / Answer
Conventional Payback Period Year 0 Year 1 Year 2 Year 3 Expected Cash flow -5500000 2200000 4675000 1925000 Cumulative cash flow -5500000 -3300000 1375000 3300000 Conventional Payback Period = 1.71 Years = 1 +(3,300,000/4,675,000) = 1.71 Years Discounted Payback Period Year 0 Year 1 Year 2 Year 3 Cash flow -5500000 2200000 4675000 1925000 PV factor of 1$ at 8% 1.00000 0.925926 0.857339 0.793832 Discounted Cash flow -5500000 2037037 4008060 1528127 Cumulative cash flow -5500000 -3462963 545097 2073224 Discounted Payback Period = 1.86 Years = 1 +(3,462,963/4,008,060) = 1.86 Years The Discounted payback period should be use when evaluating Project Sigma, given its theoretical superiority $2,073,223 does the discounted payback period method fail ti recognize due to this theoretical deficiency