Question

Cute Camel Woodcraft Company 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 Sigma's expected future cash flows. To answer this question, Cute Camel's CFO has 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 Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table Year O Year 1 Year 2 Year 3 Expected cash flow Cumulative cash flow -5,000,000 $2,000,000 $4,250,000 $1,750,000 Conventional payback period The conventional payback period ignores the time value of money, and this concerns Cute Camel's CFO. He has now asked you to compute Sigma'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 O Year 1 Year 2 Year 3 Cash floww Discounted cash flow Cumulative discounted cash flow -5,000,000 $2,000,000 $4,250,000 $1,750,000 Discounted payback period

Answer 1

Ans: 1.

Year	Cash flows	Cummulative cash flows
0	-5000000	-5000000
1	2000000	-3000000
2	4250000	1250000
3	1750000	3000000

Conventional payback period = 1 + [3000000 / 4250000]

= 1 + 0.70588

= 1.70588

2.

Year	Cash flows (A)	Discount rate( Note 1) (B)	Discounted cash flow a(A*B)	Cummulative Discounted cash flow
0	-5000000	1	-5000000	-5000000
1	2000000	0.909090909	1818181.818	-3181818.182
2	4250000	0.826446281	3512396.694	330578.5124
3	1750000	0.751314801	1314800.902	1645379.414

Discounted Payback period = 1 + ( 3181818.182 / 3512396.694 )

= 1 + 0.90588

= 1.90588

3. CFO considers Discounted payback period as a superiority

4. Amount of value discounted payback period did not recognize = $ 1645379.414

Cummulative balance in discounted payback period.

Note 1 :

r = rate of interest , n = number of years

Present value (1+r)^n	Discount rate( Note 1) (B)
1/(1+10%)	0.909090909
1/(1+10%)^2	0.826446281
1/(1+10%)^3	0.751314801