Question

Suppose Omni Consumer Products's CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost; however, she does know that the project's regular payback period is 2.5 years. If the project's weighted average cost of capital (WACC) is 7%, what is its NPV? Cash Flow Year $422,788 $350,000 Year 1 $330,878 Year 2 $450,000 $367,642 Year 3 $450,000 $441,170 $400,000 Year 4 Which of the following statements indicate a disadvantage of using the discounted payback period for capital oudgeting decisions? Check all that apply. The discounted payback period does not take the project's entire life into account. The discounted payback period does not take the time value of money into account. The discounted payback period is calculated using net income instead of cash flows

Answer 1

Calculation of initial investment: Payback period 2.5 years so, initial investment 1year cash flow 2 year cash flow +0.5 of year 3 cash flow initial investment $1,025,000 (350000+450000) +(450000*0.5) discounted cash flows cash flows x pv ] cash flows YEAR pv @ 7% -$1,025,000.00 $350,000.00 -$1,025,000.00 $327,102.80 $393,047.43 $367,334.04 0 1.0000 1 0.9346 $450,000.00 $450,000.00 2 0.8734 3 0.8163 $400,000.00 $305,158.08 0.7629 $367,642 NPV The discounted payback does not take the projet's entire life in to account