Assignment 1 1 The lhe × MindTap . Cengage lear he payback Mi-thod He x C ngo en

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Assignment 1 1 The lhe × MindTap . Cengage lear he payback Mi-thod He x C ngo engage.com/static/rb/ui/index.html?nbld-639385&nbNodeld-236012153;&deploymentid;=5 MINDTAP ssignment 11- The Basics of Capital Budgeting Due Tomorrow at 11 PM EST 7. The payback period The payback method helps firms establish and identify a maximum acceptable payback period that helps in their Aa Aa capital budgeting decisions. Consider the case of Cold Goose Metal Works Inc. Cold Goose Metal Works Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Alpha's expected future cash flows. To answer this q uestion, Cold asked that you compute the project's payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year the project's conventional payback period. For full credit, complete the Complete the following table and compute entire table. Year 2 Year 0 6,000,000 Year 1 Year 3 Expected cash flow Cumulative cash flow $2,400,000 $5,100,000 $2,100,000 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 Alpha'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 Year 0 Year 1 Year 2 5,100,000 Year 3 $2,100,000 Cash flow Discounted cash flow Cumulative discounted cash flow -6,000,000 2,400,000 Discounted peyback period

Explanation / Answer

A. Conventional Payback period:

Cumulative cash flows:

Year 0: -6000000

Year 1: -6000000+2400000 = -3600000

Year 2: -3600000+5100000 = 1500000

Year 3: 1500000+2100000 = 3600000

Payback period = 1 + 3600000/5100000 = 1.71 years

Discounted payback method:

Discounted cash flow:

Year 0: -6000000

Year 1: 2400000/1.1 = 2181818.18

Year 2: 5100000/1.1^2 = 4214876.03

Year 3: 2100000/1.1^3 = 1577761.08

Cumulative cash flows:

Year 0: -6000000

Year 1: -6000000+2181818.18 = -3818181.82

Year 2: -3818181.82 + 4214876.03 = 396694.21

Year 3: 396694.21 + 1577761.08 = 1974455.29

Discounted payback period = 1 + 3818181.82/4214876.03

= 1.91 years

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