Question

cold goose metal works inc is a small

Ch 11: Assignment- The Basics of Capital Budgeting The conventional payback period ignores the time value of money, and this concerns Cold Goose's CFO. He has now asked you to compute Beta'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 two decimal places. For full credit, comple the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.) Year 3 Year 2 Year 1 Year 0 $1,575,000 $3,825,000 $1,800,000 -$4,500,000 Cash flow $ Discounted cash flow $ Cumulative discounted cash flow Discounted payback period: years Which version of a project's payback period should the CFO use when evaluating Project Beta, given its theoretical superiority? The discounted payback period O The regular payback period One theoretical disadvantage of both payback methods-compared to the net present value method-is that they fail to consider the value of the cash flows beyond the point in time equal to the payback period. How much value in this example does the discounted payback period method fail to recognize due to this theoretical deficiency? O $1,696,274 O $2,916,953 $1,250,286

Answer 1

Year Cash flow P.V.Factor Discounted C.F Cumulative cash flows (4,500,000.00) (4,500,000) (4,500,000) 1,800,000.00 0.925925926 1,666,667 (2,833,333) 3,825,000.00 0.85733882 3,279,321 445,988 1,575,000.00 0.793832241 1,250,286 1,696,273 1.86

The discounted payback method

1,696,274