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 now asked you to compute Omega'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. Which version of a project's payback period should the CFO use when evaluating Project Omega, given its theoretical superiority? The regular payback period The discounted payback period

Explanation / Answer

The discounted payback period is the amount of time that it takes to cover the cost of a project, by adding positive discounted cash flow coming from the profits of the project

CFO should use Discounted payback period when evaluating project Omega as the discounted payback period takes into account time value of money not in regular payback period.

Year 0 1 2 3 $(4,500,000) $ 1,800,000 $3,825,000 $1,575,000 PVF@7% 1 0.935 0.873 0.816 Disconuted Cash flows $(4,500,000) $ 1,682,243 $3,340,903 $1,285,669 Cummulative Disconuted Cash flows $(4,500,000) $(2,817,757) $   523,146 $1,808,815

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