Question

6. The payback period The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Green Caterpillar Garden Supplies Inc.: Green Caterpillar Garden Supplies Inc. 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, Green Caterpillar'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. (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 o Year 1 Year 2 Year 3 Expected cash flow -$4,500,000 $1,800,000 $3,825,000 $1,575,000 Cumulative cash flow $ Conventional payback period: years The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to compute Alpha's discounted payback period, assuming the company has a 9% 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

rate positively ..

ans 1		year 0	year 1	year 2	year 3
	Expected cash flow	-4500000	1800000	3825000	1575000
	Cumulative cash flow	-4500000	-2700000	1125000	2700000
	Conventional payback period	1.71	years
ans 2
		year 0	year 1	year 2	year 3
	Expected cash flow	-4500000	1800000	3825000	1575000
	Discounted cash flow	(4,500,000)	1,651,376	3,219,426	1,216,189
	Cumulative discounted cash flow	(4,500,000)	(2,848,624)	370,802	1,586,991
	Discounted payback period	1.88	years
ans 3	Correct answer is option : The Discounted payback period
ans 4	Correct answer is option :	1,586,991