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 Fuzzy Button's CFO. He has now asked you to compute Omega'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 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 Omega, given its theoretical superiority? The regular payback period The discounted payback period 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 does the discounted payback period method fail to recognize due to this theoretical deficiency? $3, 186, 183 $1, 763, 323 $4, 928, 461 $1, 351, 321

Explanation / Answer

Calculation of Pay back period Year Cash Flow Cumulative cash flow 0 -5000000 -5000000 1 2000000 -3000000 2 4250000 1250000 3 1750000 3000000 Pay back Period= 1+(3000000/4250000) 1+.7059 1.7059 Calculation of discounted pay back period Year Cash Flow PVAF9% Net cash flow Cumulative cash flow 0 -5000000 1 -5000000 -5000000 1 2000000 0.9174 1834862 -3165138 2 4250000 0.8417 3577140 412002.4 3 1750000 0.7722 1351321 1763323 Discounted pay back period= 1+(3165138/3577140) 1+0.8848 1.8848

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