Complete the following table and compute the project\'s conventional payback per

Question

Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. The conventional payback period ignores the time value of money, and this concerns Cute Camel's CFO. He has now asked you to compute Delta's discounted payback period, assuming the company has a 10% 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. For full credit, complete the entire table. Which version of a project's payback period should the CFO use when evaluating Project Delta, given its theoretical superiority? The regular payback period The discounted payback period

Explanation / Answer

Computation of Pay Back period Conventional Metod Year Expected Cash Flow ($) Cummulative Expected Cash Flow ($) 1 2400000 2400000 2 5100000 7500000 3 2100000 9600000 Total 9600000 Initial Investment $6,000,000 Payback Period is between 1-2 years = 1 +(6000000-2400000)/5100000 =1.71 or 1 years 8 months 16 days Discounted Metod Year Expected Cash Flow ($) PV Factor % 10% PV Cummulative Expected Cash Flow ($) 1 2400000 0.9091 2181818 2181818 2 5100000 0.8264 4214876 6396694 3 2100000 0.7513 1577761 7974455 Total 7974455 Initial Investment $6,000,000 Payback Period is between 1-2 years = 1 +(6000000-2181818)/4214876 = 1.91 years or 1 year 10 monts and 28 days Regular payback period should be used in evaluating Project Delta since the payback period is less than discounted payback method

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