The conventional payback period ignores the time value of money, and this concer

Question

The conventional payback period ignores the time value of money, and this concerns Cute Camel's CFO. He has novw asked you to compute Beta's discounted payback period, assuming the company has a 7% 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 Year O Year 1 Year 2 Year 3 Cash flow Discounted cash flow Cumulative discounted cash flow -5,000,000 $2,000,000 $4,250,000 $1,750,000 Discounted payback period Which version of a project's payback period should the CFO use when evaluating Project Beta, given its theoretical superiority? O The regular payback period The discounted 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 does the discounted payback period method fail to recognize due to this theoretical deficiency? $1,428,521 O $5,140,636 $2,009,795 O $3,297,680

Explanation / Answer

discounted payback

2,009,795

Discount rate 7.0000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow      (5,000,000.00) 0                     (5,000,000.00)                 (5,000,000.00)      2,000,000.000 1                       1,869,158.88                 (3,130,841.12)      4,250,000.000 2                       3,712,114.60                       581,273.47      1,750,000.000 3                       1,428,521.28                    2,009,794.76

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