Question

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10. The payback period The payback method helps firms establish and identify a maximum acceptable payback period that helps in capital budgeting decisions. There are two versions of the payback method: the conventional payback method and the discounted payback method. Consider the following case: Cute Camel Woodcraft 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 Sigma's expected future cash flows. To answer this question, Cute Camel'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. Round the payback period to the nearest two decimal places. Be sure to complete the entire table--even if the values exceed the point at which the cost of the project is recovered. Year 3 Year o Year 1 $1,600,000 Year 2 $3,400,000 $1,400,000 $-4,000,000 Expected cash flow Cumulative cash flow Conventional payback period: years W N

Answer 1

	Year 0	Year 1	Year 2	Year 3
Expected Cash flow	-4000000	1600000	3400000	1400000
Cumulative Cash flow	-4000000	-2400000	1000000	2400000
Conventional payback	1.705882353
Discounted Cash flow	-4000000	1481481.481	2914951.989	1111365.137
Cumulative discounted cash flow	-4000000.00	-2518518.52	396433.47	1507798.61
Discounted payback	1.8640

The discounted payback period