Chapter 11 Home Grades Personalized Reviews Discussion Course Materials he Basic

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Chapter 11 Home Grades Personalized Reviews Discussion Course Materials he Basics of Capital Budgeting raded Assignment | Read Chapter 11| Back to Assignment Due Sunday 07.01.18 at 11:45 PM Attempts: Keep the Highest: /4 7. The NPV and payback period What information does the payback period provide? Suppose Acme Manufacturing Corporation's CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost; however, she does know that the project's regular payback period is 2.5 years. If the project's weighted average cost of capital (WACC) is 8%, what is its NPV? Year Cash Fl Year 1 $350,000 Year 2 $450,000 Year 3 $400,000 Year 4 $400,000 $385,705 O $257,137 O $321,421 O $353,563 Which of the following statements ndicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply The discounted payback period is calculated using net income instead of cash flows The discounted payback period does not take the project's entire life into account The discounted payback period does not take the time value of money into account. Continue without saving

Explanation / Answer

0.5 = remianing amount / 400,000

Remaining amount = 0.5 * 400,000

Remaining amount = 200,000

Initial investment = 350,000 + 450,000 + 200,000 = 1,000,000

NPV = present value of cash inflows - present value of cash outflows

NPV = -1,000,000 + 350,000 / ( 1 + 0.08)1 + 450,000 / ( 1 + 0.08)2 + 400,000 / ( 1 + 0.08)3 + 400,000 / ( 1 + 0.08)4

NPV = $321,421.38

2)

The discounted payback does not take the project's entire life into account.

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