Question

Blue Hamster Manufacturing 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 question, Blue Hamster'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 0 Year 1 Year 2 Year 3 Expected cash flow Cumulative cash flow 5,500,000 $2,200,000 $4,675,000 $1,925,000 Conventional payback period The conventional payback period ignores the time value of money, and this concerns Blue Hamster's CFO. He has now asked you to compute Alpha's discounted payback period, assuming the company has a 8% 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 flow Discounted cash flow Cumulative discounted cash flow 5,500,000 $2,200,000 $4,675,000 $1,925,000 Discounted payback period

Answer 1

1)		Year 0	Year 1	Year 2	Year 3
	Expected cash flow	-5500000	2200000	4675000	1925000
	Cumulative cash flow	-5500000	-3300000	1375000	3300000
	Conventional payback period = 1+3300000/4675000 =	1.71	Years
		Year 0	Year 1	Year 2	Year 3
2)	Expected cash flow	-5500000	2200000	4675000	1925000
	Discounted cash flow	-5500000	2037037	4008059	1528127
	Cumulative discounted cash flow	-5500000	-3462963	545096	2073223
	Discounted payback period = 1+3462963/4008059 =	1.86	Years
3)	Which version…………………………………………superiority?
	*The discounted payback period.
4)	Value not recognized = $2073223 (NPV)