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 Alpha'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. (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 3 $3,825,000 Year o Year 1 Expected cash flow $4,500,000 $1,800,000 Cumulative cash flow SS Conventional payback period: years The conventional payback period ignores the time value of money, and this concerns Cute Chmel'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 penod 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.)

Answer 1

Using excel formula to calculate

Year	0	1	2	3
Project A	-$4,500,000.00	$1,800,000.00	$3,825,000.00	$1,575,000.00
Cumulative Cash flow	-4500000	-2700000	1125000	2700000
Payback Period	1.71
excel formula	(=1+1700000/3825000)
Year	0	1	2	3
Project A	-$4,500,000.00	$1,800,000.00	$3,825,000.00	$1,575,000.00
Discounted Cash Flow	-4500000.00	1666666.67	3279320.99	1250285.78
Cumulative Cash flow	-4500000.00	-2833333.33	445987.65	1696273.43
Discounted Payback Period	1.86
excel formula	(1+2833333.33/3279320.99)

Discounted Pay back period is better.

The theoretical deficiency due to discounted cash flow =1250285.78 or 1250286 (Option c is correct option)