MindTap - Cengage Learning- Internet Explorer MindTop Assignment 11-The Basics o
ID: 2724670 • Letter: M
Question
MindTap - Cengage Learning- Internet Explorer MindTop Assignment 11-The Basics of Capital Budgeting 8. The NPV and payback period Aa Aa What information does the payback period provide? Suppose you are evaluating a project with the cash inflows shown in the following table. Your boss has asked you to calculate the project's NPV. You dont know the project's initial cost, but you do know the project's regular payback period is 2.5 years. If the project's WACC is 8%, the project's NPV is which Year Cash Flow Year 1 $325,000 Year 2 $500,000 Year 3 $400,000 Year 4 $450,000 of the following? O $352,892 O $370,537 O $317,603 $405,826 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. The payback period is calculated using net income instead of cash flows. The payback period does not take the project's entire life into account. The payback period does not take the time value of money into account.Explanation / Answer
Answer 1
Since the pay back period is 2.5 years hence initial investment=325000+500000+(400000/2)=1025000
NPV=-1025000+325000/(1.08)+500000/(1.08^2)+400000/(1.08^3)+450000/(1.08^4)=352891.7=352892
Answer 2 The payback method doesn't take into account time value of money.