he conventional payback period ignores the time value of money, and this concerns Cold Goose’s CFO. He has now asked you to compute Sigma’s discounted payback period, assuming the company has a 10% 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 two decimal places. For full credit, complete the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.) Year 0 Year 1 Year 2 Year 3 Cash flow -$5,000,000 $2,000,000 $4,250,000 $1,750,000 Discounted cash flow Cumulative discounted cash flow Discounted payback period: years Which version of a project’s payback period should the CFO use when evaluating Project Sigma, given its theoretical superiority? The discounted payback period The regular 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 in this example does the discounted payback period method fail to recognize due to this theoretical deficiency? $4,827,198 $1,645,380 $3,132,983 $1,314,801

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 5MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....

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he conventional payback period ignores the time value of money, and this concerns Cold Goose’s CFO. He has now asked you to compute Sigma’s discounted payback period, assuming the company has a 10% 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 two decimal places. For full credit, complete the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.)

	Year 0	Year 1	Year 2	Year 3
Cash flow	-$5,000,000	$2,000,000	$4,250,000	$1,750,000
Discounted cash flow
Cumulative discounted cash flow
Discounted payback period:	years

Which version of a project’s payback period should the CFO use when evaluating Project Sigma, given its theoretical superiority?

The discounted payback period

The regular 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 in this example does the discounted payback period method fail to recognize due to this theoretical deficiency?

$4,827,198

$1,645,380

$3,132,983

$1,314,801

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