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 Cold Goose's CFO. He has now 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. Which version of a project's payback period should the CFO use when evaluating Project Beta, given its theoretical superiority? 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 fall to recognize due to this theoretical deficiency? $6, 168, 764 $2, 411, 755 $1, 714, 226 $3, 957, 217

Explanation / Answer

Ans: Calculation of discounted payback period Year Cash Flow PVAF 7% Disc. Cash flow Cumulative Dis. Cash flow 0 -6000000 1 -6000000 -6000000 1 2400000 0.9346 2242991 -3757009.346 2 5100000 0.8734 4454538 697528.1684 3 2100000 0.8163 1714226 2411753.71 Dis. Pay Back period= 1+3757009.346/4454538 1+.8434 1.8434 Ans2 Discounted cash flow method The Benefit of using discounted cash flow method is that it also consider the time value of money therefore while evaluating project beta Discounted cash flow should be used. Ans: Calculation of NPV Year Year Cash Flow PVAF 7% Disc. Cash flow 0 -6000000 1 -6000000 1 2400000 0.9346 2242991 2 5100000 0.8734 4454538 3 2100000 0.8163 1714226 NPV= 2411754 Ans 4: B is correct $ 2411754 is not recognise by Discounted pay back peeriod method due to theoretical deficiency

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