80198Nsdeld-2109961048 deploymentld-551651215053483539471157998elSBN-978130 5% M

Question

80198Nsdeld-2109961048 deploymentld-551651215053483539471157998elSBN-978130 5% MINDTAP Carlos Rosado Vega Assignment 11-The Basics of Capital Budgeting Due on Nov 25 at 11:59 PM EST Complete the following table and compute the project's convent onal payback period. For full credit, complete the entire table. Year 0 ar 1 Year 2 Year 3 -4,000,000 $1,600,000 $3,400,000 $1,400,000 $4,000,0001-2 100,000 ]1,000,000! $2,400,000 Expected cash flow Cumulative cash flow Conventional payback period: 1.71 years The conventional payback period ignores the time value of money, and this concerns Cold Goose's asked you to compute Alpha's discounted payback period, assuming the connpany has a 10% cost of atat CFO. He has now e the following table and perform any necessary calculations. Round the discounted cash flow values to the . For full credit, complete r, and the discounted payback period to the nearest two decimal places nearest whole dolla the entire table Year 0 Year 3 Year 1 $1,600,000 1,445,545 Year 2 Cash flow -4,000,000 -4,000,000 $3,400,000 $1,400,000 1,051,841 Discounted cash flow mulative discounted cash flow 4,000,000 Discounted payback period: 1.86 years 33.917 21

Explanation / Answer

The cumulative discounted cash flow:

Year 0: -4000000

Year 1: -4000000+1445545 = -2554455

Year 2: -2554455+2809917 = 255462

Year 3: 255462+1051841 = 1307303

So, discounted payback period = 1 + 2554455/2809917

= 1.91 years

The CFO should consider discounted cash flow model since it takes into account the cost of capital too, which the normal payback fails to consider.

Value discounted payback fails to consider =

= Cash flows after payback period I.e. cash flows after year 2

= 1051841

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