Question

Assignment 11 - The Basics of Capital Budgeting Back to Assignment Attempts: Atention: Due to a bug in Google Chrome, not tun Keep the Highest: /16 e, this page may not function correctly. Click here to learn more. 7. The payback period The payback method helps firms establish and identfy a maximum a capital budgeting decisions acceptable payback period that helps in their Consider the case of Fuzzy Button Clothing Company: Fuzzy Button Clothing 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 Fuzzy Button'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 Year O Year 1 Year 2 $5,100,000 Year 3 Expected cash flow Cumulative cash flow -6,000,000 $2,400,000 $2,100, coo Conventional payback period: The conventional payback period ignores the time value of money, and this concerns Fuzzy Button's CFO. He has now asked you to compute Alpha's discounted payback period, assuming the company has a 9%cost or 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 o Year 1 Year 2 Year 3 Cash flow Discounted cash flow Cumulative discounted cash flow[ -6,000,000 $2,400,000 $5,100,000$2,100,000 Discounted payback period:

Answer 1