Question

12. The NPV and payback period Suppose you are evaluating a project with the cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. The project's annual cash flows are: Year Cash Flow Year 1 Year 2 Year 3 $325,000 400,000 300,000 Year 4 325,000 If the project's desired rate of return is 10.00%, the project's NPV-rounded to the nearest whole dollar-is Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply. The discounted payback period does not take into effect the time value of money effects of a project's cash flows. The payback period does not take into account the cash flows produced over a project's entire life. The discounted payback period is calculated using net income instead of cash flows.

Answer 1

1)

0.5 = X / 300,000

150,000 = X

Initial investment = 150,000 + 400,000 + 325,000 = 875,000

NPV = Present value of cash inflows - present value of cash outflows

NPV = -875,000 + 325,000 / (1 + 0.1)¹ + 400,000 / (1 + 0.1)² + 300,000 / (1 + 0.1)³ + 325,000 / (1 + 0.1)⁴

NPV = $198,407

2)

Nothing needs to be checked as bone of the options are disadvantages of discounted cash flow.

Discounted payback period does take into account time value money.

2nd option mentions about payback period and not discounted payback period.

Discounted payback period uses cash flows instead of net income.