Complete the following table and compute the project\'s conventional payback per
ID: 2782748 • Letter: C
Question
Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table Year 0 Year 1 Year 2 Year 3 Expected cash flow Cumulative cash flow -4,500,000 $1,800,000 $3,825,000 $1,575,000 Conventional payback period: The conventional payback period ignores the time value of money, and this concerns Cold Goose's CFO. He has now asked you to compute Delta'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 Year 0 Year 1 Year 2 Year 3 Cash flovw Discounted cash flow Cumulative discounted cash flow -4,500,000 $1,800,000 $3,825,000 $1,575,000 Discounted payback period Which version of a project's payback period should the CFO use when evaluating Project Delta, given its theoretical superiority? The discounted payback period O The regular 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? O $1,216,189 $2,867,565 $4,435,615 O $1,586,991Explanation / Answer
Where,
A = Last period with a negative cumulative cash flow;
B = Absolute value of cumulative cash flow at the end of the period A;
C = cash flow during the period after A.
Payback period = 1 + 2700000/3825000 = 1.71 years
Discounted payback period:
DPB = 1 + 2848623.85/3219425.94 = 1.88 years
- CFO should use the discounted payback period, because it takes the expeced cashflows' time value of money into account.
- Option D. Discounted payback period assumes that a project ceases to generate cashflow at a point in time equal to the discounted payback period. But the project actually generates another 1586991 in shareholder wealth (The last discounted value)
Payback Period = A + B C