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6. The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with theWhich of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback per

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Answer #1

Payback Period is the time when initial investment equals Cash inflow,

Here,

Payback period = 2.5 years,

So,

Initial Investment = 275,000 + 425,000 + 0.50(400,000)

Initial Investment = $900,000

NPV = -900,000 + 275,000(1.07) + 425,000/(1.07)2 + 400,000/(1.07)3 + 425,000/(1.07)4

NPV = $378,970

Payback Period does not take project's entire life into account

Payback Period does not take time value of money into account

These are disadvantages to Payback Period Method.

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