Question

Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Year 0 Year 1 Year 2 Year 3 -$6,000,000 $2,400,000 $5,100,000 $2,100,000 Expected cash flow Cumulative cash flow Conventional payback period: years The conventional payback period ignores the time value of money, and this concerns Cold Goose's CFO. He has now asked you to compute Delta's discounted payback period, assuming the company has a 7% 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 two decimal places. For full credit, complete the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.) Year o Year 3 Year 1 $2,400,000 Year 2 $5,100,000 Cash flow -$6,000,000 $2,100,000 $ Discounted cash flow Cumulative discounted cash flow Discounted payback period: $ years Which version of a project's payback period should the CFO use when evaluating Project Delta, given its theoretical superiority? The regular payback period The discounted payback period

Answer 1

A В C D E 1 Year 0 Year 1 Year 2 Year 3 2 Expected cash flow (6,000,000) 2,400,000 5,100,000 2,100,000 (3,600,000) 3 Cumulative cash flow (6,000,000) 3,600,000 1,500,000 4 5 Conventional payback period 1.7059 years 6 7 Year 0 Year 1 Year 2 Year 3 9 Expected cash flow (6,000,000) 2,400,000 5,100,000 2,100,000 10 Discounted Cash flow (6,000,000) 2,242,991 4,454,538 1,714,226 11 Cumulative cash flow (6,000,000) (3,757,009) 2,411,754 697,528 12 13 Conventional payback period 1.8434 years 14 15 Given discounted payback takes time value of money into consideration, that is a superior 16 approach to regular payback 17

A В D E Year 0 1 Year 1 Year 2 Year 3 2 Expected cash flow 3 Cumulative cash flow 2400000 5100000 -6000000 2100000 B3+C2 C3+D2 -B2 -D3+E2 4 5 Conventional payback period =1+ (-C3/D2) years 6 7 Year 1 Year 0 Year 2 Year 3 9 Expected cash flow 10 Discounted Cash flow 11 Cumulative cash flow C2 -D2 E2 -B2 D9/(1+7% )^2 B9/(1+7%)A0 =C9/(1+7% )^1 =E9/(1+7%)^3 B11+C10 C11+D10 -B10 -D11 + E10 12 13 Conventional payback period =1+(-C11/D10) years 14 15 16 Given discounted payback takes time value of money into consideration, that is a superior approach to regular payback 17 18 19 Discounted payback fails to recognize value -E11 20