Question

What information does the payback period provide?

Suppose Praxis Corporation’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years.

Year |
Cash Flow |
---|---|

Year 1 | $300,000 |

Year 2 | $450,000 |

Year 3 | $400,000 |

Year 4 | $450,000 |

If the project’s weighted average cost of capital (WACC) is 10%, what is its NPV?

A.) $302,510

B.) $332,761

C.) $317,636

D.) $287,385

Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Choose all that apply.

A.) The discounted payback period does not take the project’s entire life into account.

B.) The discounted payback period does not take the time value of money into account.

C.) The discounted payback period is calculated using net income instead of cash flows.

Answer #1

**The NPV is computed as follows:**

**The NPV is computed as shown below:**

**= Initial investment + Present value of future cash
flows**

**Initial investment is computed as follows:**

**= Year 1 cash flow + Year 2 cash flow + 0.50 x Year 3
cash flow**

= $ 300,000 + $ 450,000 + 0.50 x 400,000

**= $ 950,000**

**So, the NPV is computed as follows:**

= - $ 950,000 + $ 300,000 / 1.10 + $ 450,000 / 1.10^{2}
+ 400,000 / 1.10^{3} + $ 450,000 / 1.10^{4}

**= $ 302,510 Approximately**

**The discounted payback period does not take the
project’s entire life into account indicate a disadvantage of using
the discounted payback period for capital budgeting
decisions.**

Feel free to ask in case of any query relating to this question

7. The NPV and payback
period
What information does the payback period
provide?
Suppose Extensive Enterprises’s CFO is evaluating a project with
the following cash inflows. She does not know the project’s initial
cost; however, she does know that the project’s regular payback
period is 2.5 years.
Year
Cash Flow
Year 1
$325,000
Year 2
$500,000
Year 3
$450,000
Year 4
$450,000
If the project’s weighted average cost of capital (WACC) is 8%,
what is its NPV?
$367,583
$312,446
$404,341...

Suppose Acme Manufacturing Corporation’s CFO is evaluating a
project with the following cash inflows. She does not know the
project’s initial cost; however, she does know that the project’s
regular payback period is 2.5 years.
Year
Cash Flow
Year 1
$350,000
Year 2
$425,000
Year 3
$475,000
Year 4
$425,000
If the project’s weighted average cost of capital (WACC) is 7%,
what is its NPV?
$397,786
$437,565
$417,675
$457,454
Which of the following statements indicate a disadvantage of
using the...

Suppose Acme Manufacturing Corporation’s CFO is evaluating a
project with the following cash inflows. She does not know the
project’s initial cost; however, she does know that the project’s
regular payback period is 2.5 years.
Year
Cash Flow
1
$325,000
2
$475,000
3
$500,000
4
$475,000
1. If the project’s weighted average cost of capital (WACC) is
9%, what is its NPV?
$314,973
$426,141
$389,085
$370,557
2. Which of the following statements indicate a disadvantage of
using the discounted payback...

Suppose Extensive Enterprises’s CFO is evaluating a project with
the following cash inflows. She does not know the project’s initial
cost; however, she does know that the project’s regular payback
period is 2.5 years.
Year
Cash Flow
Year 1
$275,000
Year 2
$450,000
Year 3
$500,000
Year 4
$400,000
If the project’s weighted average cost of capital (WACC) is 9%,
what is its NPV?
A. $260,409
B. $390,613
C. $325,511
D. $309,235
Which of the following statements indicate a disadvantage...

Suppose Praxis Corporation’s CFO is evaluating a project with
the following cash inflows. She does not know the project’s initial
cost; however, she does know that the project’s regular payback
period is 2.5 years.
Year
Cash Flow
Year 1
$375,000
Year 2
$400,000
Year 3
$400,000
Year 4
$400,000
If the project’s weighted average cost of capital (WACC) is 8%,
what is its NPV?
$343,038
$261,362
$392,044
$326,703

Payback period essentially provides the number of years it would
take for a project to recover the initial investment from its
operating cash flows. As the model was criticized, the model
evolved incorporating time value of money to create the discounted
payback method. The models still reflected faulty ranking criteria
but they provided important information about liquidity and
risk.
Cash flows expected in the distant future are
more/less risky than cash flows received in the
near-term—which suggests that the payback...

Payback period essentially provides the number of years it would
take for a project to recover the initial investment from its
operating cash flows. As the model was criticized, the model
evolved incorporating time value of money to create the discounted
payback method. The models still reflected faulty ranking criteria
but they provided important information about liquidity and
risk.
Cash flows expected in the distant future aremore
risky than cash flows received in the near-term—which
suggests that the payback period...

The NPV and payback period
Suppose you are evaluating a project with the cash inflows shown
in the following table. Your boss has asked you to calculate the
project’s net present value (NPV). You don’t know the project’s
initial cost, but you do know the project’s regular, or
conventional, payback period is 2.50 years.
The project's annual cash flows are:
Year
Cash Flow
Year 1
$400,000
Year 2
600,000
Year 3
500,000
Year 4
475,000
If the project’s desired rate...

7. The NPV and payback period
Suppose you are evaluating a project with the cash inflows shown
in the following table. Your boss has asked you to calculate the
project’s net present value (NPV). You don’t know the project’s
initial cost, but you do know the project’s regular, or
conventional, payback period is 2.50 years.
The project's annual cash flows are:
Year
Cash Flow
Year 1
$350,000
Year 2
600,000
Year 3
600,000
Year 4
450,000
If the project’s desired...

11. The NPV and payback period
What information does the payback period provide?
A project’s payback period (PB) indicates the number of years
required for a project to recover its initial investment using its
operating cash flows. As the theoretical soundness of the
conventional (undiscounted) PB technique was criticized, the model
was modified to incorporate the time value of money-adjusted
operating cash flows to create the discounted payback method. While
both payback models continue to reflect faulty ranking criteria,
they...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 40 minutes ago

asked 52 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 4 hours ago

asked 4 hours ago

asked 4 hours ago

asked 4 hours ago

asked 5 hours ago

asked 5 hours ago