Blue Hamster Manufacturing Inc. is a small firm, and several of its managers are
ID: 2770241 • Letter: B
Question
Blue Hamster Manufacturing Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Sigma's expected future cash flows. To answer this question, Blue Hamster's CFO has asked that you compute the project's payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. The conventional payback period ignores the time value of money, and this concerns Blue Hamster's CFO. He has now asked you to compute Sigma's discounted payback period, assuming the company has a 8% 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.Explanation / Answer
Year
0
1
2
3
CashFlow
(5,000,000)
2,000,000
4,250,000
1,750,000
Cum Cash Flow
(5,000,000)
(3,000,000)
1,250,000
3,000,000
Conventional Payback period= 1+3,000,000/4,250,000
=1+0.70
=1.70 years
Year
0
1
2
3
Cash Flow
(5,000,000)
2,000,000
4,250,000
1,750,000
PV Factor @ 8%
1.0000
0.9259
0.8573
0.7938
PV cash flow
(5,000,000)
1,851,852
3,643,690
1,389,206
Discounted cum Cash flow
(5,000,000)
(3,148,148)
495,542
1,884,748
Discounting Payback period= 1+3,148,148/3,643,690
= 1+0.86
=1.86 years
Year
0
1
2
3
CashFlow
(5,000,000)
2,000,000
4,250,000
1,750,000
Cum Cash Flow
(5,000,000)
(3,000,000)
1,250,000
3,000,000
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