The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting dedsions. Consider the case of Cold Goose Metal Works Inc.: Cold Goose Metal Works 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 Beta's expected future cash flows. To answer this question, Cold Goose'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. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) tory Year 0 Year 1 Year 2 Year 3 Expected cash flow -$4,500,000 $1,800,000 $3,825,000 $1,575,000 Cumulative cash flow Conventional payback period: years The conventional payback period ignores the time value of money, and this concerns Cold Goose's CFO. He has now asked you to compute Beta's discounted payback period, assuming the company has a 8% cost of cagital. 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 dedmal 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 -$4,500,000 $1,800,000 $3,825,000 $1,575,000 Discounted cash flow 2. Cumulative discounted cash flow Discounted payback period: years Which version of a project's payback perlod should the CFO use when evaluating Project Beta, given its theoretical superiority? O The discounted payback period O 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 bevond the point in time equal to the payback perlod. 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 perlod. How much value in this example does the discounted payback period method fail to recognize due to this theoretical deficiency? O $1,250,286 O $1,696,274 O $4,529,607 O $2,916,953

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 28P
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pols
The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting dedisions.
Consider the case of Cold Go0se Metal Works Inc.:
Cold Goose Metal Works Inc. is a small firm, and several of its managers are worried about how soon the firm will be able
recover its
initial investment from Project Beta's expected future cash flows. To answer this question, Cold Goose'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.
IS
Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. (Note: Round the
conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.)
uctory
Year 0
Year 1
Year 2
Year 3
Expected cash flow
$4,500,000
$1,800,000
$3,825,000
$1,575,000
Curnulative cash flow
Conventional payback period:
years
The conventional payback period ignores the time value of money, and this concerns Cold Goose's CFO. He has now asked you to compute Beta'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 two dedmal 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
$4,500,000
$1,800,000
$3,825,000
$1,575,000
Discounted cash flow
Cumulative discounted cash flow
Discounted payback period:
years
Which version of a project's payback perlod should the CFO use when evaluating Project Beta, given its theoretical superiority?
O The discounted payback period
O 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 bevond the point in time equal to the 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?
O $1,250,286
O $1,696,274
O $4,529.607
O $2,916,953
Transcribed Image Text:pols The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting dedisions. Consider the case of Cold Go0se Metal Works Inc.: Cold Goose Metal Works Inc. is a small firm, and several of its managers are worried about how soon the firm will be able recover its initial investment from Project Beta's expected future cash flows. To answer this question, Cold Goose'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. IS Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) uctory Year 0 Year 1 Year 2 Year 3 Expected cash flow $4,500,000 $1,800,000 $3,825,000 $1,575,000 Curnulative cash flow Conventional payback period: years The conventional payback period ignores the time value of money, and this concerns Cold Goose's CFO. He has now asked you to compute Beta'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 two dedmal 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 $4,500,000 $1,800,000 $3,825,000 $1,575,000 Discounted cash flow Cumulative discounted cash flow Discounted payback period: years Which version of a project's payback perlod should the CFO use when evaluating Project Beta, given its theoretical superiority? O The discounted payback period O 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 bevond the point in time equal to the 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? O $1,250,286 O $1,696,274 O $4,529.607 O $2,916,953
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