Question

What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. If the project's ~WACC is 9%, the project's NPV (rounded to the nearest dollar) is: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $300,000 $500,000 $475,000 $450,000 O $395,770 0 $412,978 $344,148 $326,941 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 does not take the time value of money into account. The payback period does not take the project's entire life into account. The payback period is calculated using net income instead of cash flows.

Answer 1

Ans $ 344148

The payback period does not take the time value of money into account.

Year	Project Cash Flows (i)	DF@ 9%	DF@ 9% (ii)	PV of Project ( (i) * (ii) )
0	-1037500	1	1	(10,37,500)
1	300000	1/((1+9%)^1)	0.917	2,75,229
2	500000	1/((1+9%)^2)	0.842	4,20,840
3	475000	1/((1+9%)^3)	0.772	3,66,787
4	450000	1/((1+9%)^4)	0.708	3,18,791
		NPV		3,44,148
	Outflow =	Payback of 2.5 years
		Year1 + Year 2 + 0.5 * Year 3
		300000 + 500000 + 0.5 * 475000
		1037500