Please help with all of this and check to see if I got the the first part right.
ID: 2761676 • Letter: P
Question
Please help with all of this and check to see if I got the the first part right.
The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to compute Alpha'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 Alpha, 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 fail to recognize due to this theoretical deficiency? $2,638,144 $4,112,509 $1,142,817 $51,607,836Explanation / Answer
Above 1st part is correct.
Discounted casf flow =[ Present Value = Future Value / (1+r)^n] Cumilative discounted cash flow
for year 0 = -$4000000 -$4000000
for year 1 = $1600000 /(1+7%)^1 = $1495327 - $ 4000000 + 1495327 = -$2,504,673
for year 2 =$3,400,000/(1+7% )^2 = $2,969,691 -$2,504,673 + $2969691 = $465018
for year 3 = $1400000(1+7% ) ^3 = $1142817 $465018+$1142817 = $1607835
Discounted Payback period = 1.84
The CFO should use discounted payback period method than payback period method because it discounts cash flows at the project's required rate of return. Its use is primarily a measure of liquidity.
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