Test: Test # 2 Submit Test This Question: 1 pt 28 of 50 (14 complete) This Test:

Question

Test: Test # 2 Submit Test This Question: 1 pt 28 of 50 (14 complete) This Test: 50 pts possible Comparing payback period and discounted payback period. Mathew, Inc. is debating using the payback period versus the discounted payback period for small-dollar projects. The company's information officer has submitted a new computer project with a cost of $15,000. The cash flow will be $5,000 each year for the next five years. The cutoff period used by the company is 3 years. The information officer states that it doesn't matter which model the company uses for the decision the project is clearly acceptable. Demonstrate for the information officer that the selection of the model does matter. What is the payback period for the project? years (Round to one decimal place.) Calculate the discounted payback period for the project at any positive discount rate, say 1%. The discounted payback period for the project is There ore, with the payback period the project s a whereas with the discounted payback period the project is a | the 3-year cutoff period. (Select from the drop-down menu.) , so the selectio of the method Select from the drop-down menus.) doesn't matter does matter Enter your answer in the answer box.

Explanation / Answer

Soln: Payback period is the capital budgeting and time required , in which Net cash flow will not be negative.

Payback period = no. of years where , Cash inflows = >cash outflows.

Here,Payback period will be = -$15000 +5000 + 5000 + 5000 = 0 hence after 3 years. Payback period = 3 years

In this we do not use time value of money. Discounted payback period, discount is 1%.

So, discounted payback period = -15000/(1.01)0 + 5000/(1.01)1 + 5000/(1.01)2 + 5000/(1.01)3 + 5000/(1.01)4

When we calculate the above equation, we will see that after 3years the net cash flow will be $-295 and when adding the 4th year cash flow, it become positive. So, discounted payback period = 4 years

Discounted payback period is greater than 3 year cut off period.

So, with payback period the project is a go, whereas with discounted payback period it is no go project. Hence, the selection of method does matter.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.