Question

en min, and several or its managers are worried about how soon the TIF will be able to recover its initial investment from Project Delta'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 Year Year o Expected cash flow Cumulative cash flow -6,000,000 Year 1 $2,400,000 EZ Year 2 $5,100,000 Year 3 $2,100,000 Conventional payback period: The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to compute Delta's discounted payback period, assuming the company has a 8% 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 the nearest two decimal places. For full credit, complete the entire table Cash flow Discounted cash flow Cumulative discounted cash flow Year o -6,000,000 Year 1 $2,400,000 Year 2 $5,100,000 Year 3 $2.100.000 Discounted payback period: Which version of a project's payback period should the CFO use when evaluating Project Delta, given its theoretical Superiority? The discounted payback period Thereaular payback period

Answer 1

Year Cash flow P.V.Factor Discounted C.F Cumulative cash flows 0 (6,000,000.00) (6,000,000) (6,000,000) 1 2,400,000.00 2,400,000 (3,600,000) 2 5,100,000.00 1 5,100,000 1,500,000 3 2,100,000.00 1 2,100,000 3,600,000 1.71

Year Cash flow P.V.Factor Discounted C.F Cumulative cash flows 0 (6,000,000.00) (6,000,000) (6,000,000) 2,400,000.00 0.925926 2,222,222 (3,777,778) 5,100,000.00 0.857339 4,372,428 594,650 3 2,100,000.00 0.793832 1,667,048 2,261,698 1.86 2

Discounted payback method

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