What information does the payback period provide? Suppose you are evaluating a p
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What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You dont know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. If the project's NWACC~ is 9%, the project's NPV (rounded to the nearest dollar) is Year Cash Flow Year 1 $325,000 Year 2 $500,000 Year 3 $450,000 Year 4 $475,000 O $282,392 O $388,289 O $300,042 O $352,990 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. The payback period is calculated using net income instead of cash flows. The payback period does not take the project's entire life into account. The payback period does not take the time value of money into account.Explanation / Answer
Payback period = A + B/C
Where,
A = Last period with a negative cumulative cash flow;
B = Absolute value of cash flow at the end of the period A;
C = cash flow during the period after A.
Initial cost = Year 1 cashflow + Year 2 cashflow + 0.5*year 3 cashflow
Initial cost = 325000 + 500000 + 0.5*1275000 = 1050000
NPV is calculated by discounting the cashflows
PV = C/(1+r)^n
C - Cashflow
r - Discount rate
n - years to the cashflow
NPV = $352990
Option D.
B.
Options b,c
Payback period doesn't consider the entire project's life into account.
Payback period does not take time value of money into account.
Rate 9.00% Year Cashflow (B) Discount rate = 1/(1+r)^(n) Present value of cashflow = A*discount rate 0 -1050000.00 1.00 -1050000.00 1 325000.00 0.92 298165.14 2 500000.00 0.84 420840.00 3 450000.00 0.77 347482.57 4 475000.00 0.71 336501.98 NPV 352990Related Questions
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