Question

CLIORUL DIN Search this cour Ch 11: Assignment - The Basics of Capital Budgeting 6. The payback period The payback method helps firms establish and identify a E ceptable payback period that helps in their capital budgeting decisions. Consider the case of Cute Camel Woodcraft Company: 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. hahah 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 1 Year 2 Year 3 Year 0 -$4,500,000 $1,800,000 $3,825,000 $1,575,000 Expected cash flow Cumulative cash flow Conventional payback period: years The conventional payback period ignores the time value of money, and this concerns Cute Camel'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 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

A В C D E 1 Year 0 Year 1 Year 2 Year 3 2 Expected cash flow (4,500,000) 1,575,000 1,800,000 3,825,000 3 Cumulative cash flow (4,500,000) (2,700,000) 2,700,000 1,125,000 4 5 Conventional payback period 1.7059 years 6 7 Year 0 Year 1 Year 2 Year 3 9 Expected cash flow 10 Discounted Cash flow 11 Cumulative cash flow (4,500,000) 1,800,000 3,825,000 1,575,000 (4,500,000) 1,666,667 3,279,321 1,250,286 (4,500,000) (2,833,333) 1,696,273 445,988 12 13 Conventional payback period 1.8640 years 14 15 Given discounted payback takes time value of money into consideration, that is a superior approach 16 to regular payback 17 18 19 Discounted payback fails to recognize value 1,696,273 20 21

A В C D E Year 2 1 Year 0 Year 1 Year 3 2 Expected cash flow Cumulative cash flow -4500000 3825000 1575000 1800000 3 -B2 -В3+C2 -C3+D2 D3+E2 4 5 Conventional payback period =1+ (-C3/D2) years 6 Year 0 Year 1 Year 2 Year 3 9 Expected cash flow 10 Discounted Cash flow 11 Cumulative cash flow -B2 -C2 -D2 =E2 =C9/(1+8% )^1 =D9/(1+8% )A2 -B9/(1+8%)^0 =E9/(1+8%)^3 -C11+D10 D11+E10 -B10 -B11+C10 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 19 Discounted payback fails to recognize value -E11 20