Question

Cold Goose Metal Works 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 Sigma's expected future cash flows. To answer this question, Cold Goose'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. Year 0 -4,500,000 Year 1 $1,800,000 Year 2 $3,825,000 Year 3 $1,575,000 Expected cash flow Cumulative cash flow Conventional payback period: The conventional payback period ignores the time value of money, and this concerns Cold Goose'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 1 Year o -4,500,000 Year 2 $3,825,000 Year 3 $1,575,000 $1,800,000 Cash flow Discounted cash flow Cumulative discounted cash flow Discounted payback period:

Answer 1

	Year 0	Year 1	Year 2	Year 3
Expected Cash flow	-4500000	1800000	3825000	1575000
Cumulative Cash flow	-4500000	-2700000	1125000	2700000
Conventional payback	1.705882353
Discounted Cash flow	-4500000	1636363.636	3161157.025	1183320.811
Cumulative discounted cash flow	-4500000.00	-2863636.36	297520.66	1480841.47
Discounted payback	1.9059

The discounted payback period

1480841.47