Question

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. Year Cash Flow Year 1 $325,000 Year 2 $450,000 Year 3 Year 4 $500,000 $500,000 If the project's weighted average cost of capital (WACC) is 10%, the project's NPV (rounded to the nearest dollar) is: $359,520 O $395,472 O $341,544 $377,496 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

NPV = PV of cash Inflows - PV of cash Outflows

When Payback period is 2.5 years

Initial Investemnt = CF in 2 Years + [ 0.5 * Cf in Year 3 ]

= $ 325000 + $450000 + [ 0.5 * 500000 ]

= 325000 +450000 +250000

= 1025000

NPV = PV of cash Inflows - PV of cash Outflows

Year	CF	PVF @10%	Disc CF
0	$ -10,25,000.00	1.0000	$ -10,25,000.00
1	$     3,25,000.00	0.9091	$     2,95,454.55
2	$     4,50,000.00	0.8264	$     3,71,900.83
3	$     5,00,000.00	0.7513	$     3,75,657.40
4	$     5,00,000.00	0.6830	$     3,41,506.73
NPV			$    3,59,519.50

PBP is the period in which Inital investment is recovered.

It doen't consider the time Value of Money.

It doesn't consier the time after PBP

It considers cash FLows only.

Hence option A and B are correct.