Question

Payback period essentially provides the number of years it would take for a project to recover...

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 period can also serve as an indicator of project risk.

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 2 500,000
Year 3 475,000
Year 4 400,000

If the project’s weighted average cost of capital (WACC) is 8%, what is its NPV?

$289,025

$391,033

$340,029

$306,026

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

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

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

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

Homework Answers

Answer #1

Answer a.

Cash flows expected in the distant future are more risky than cash flows received in the near-term—which suggests that the payback period can also serve as an indicator of project risk.

Answer b.

Payback Period = 2.50 years

Initial Investment = $300,000 + $500,000 + 50% * $475,000
Initial Investment = $1,037,500

WACC = 8%

Net Present Value = -$1,037,500 + $300,000/1.08 + $500,000/1.08^2 + $475,000/1.08^3 + $400,000/1.08^4
Net Present Value = $340,029

Answer c.

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

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Payback period essentially provides the number of years it would take for a project to recover...
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...
11. The NPV and payback period What information does the payback period provide? A project’s payback...
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...
What information does the payback period provide? Suppose Praxis Corporation’s CFO is evaluating a project with...
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...
7. The NPV and payback period What information does the payback period provide? Suppose Extensive Enterprises’s...
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...
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 Acme Manufacturing Corporation’s CFO is evaluating a project with the following cash inflows. She does...
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...
The NPV and payback period Suppose you are evaluating a project with the cash inflows shown...
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...
Suppose Extensive Enterprises’s CFO is evaluating a project with the following cash inflows. She does not...
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...
7. The NPV and payback period Suppose you are evaluating a project with the cash inflows...
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...
Suppose you are evaluating a project with the cash inflows shown in the following table. Your...
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 $375,000 Year 2 550,000 Year 3 400,000 Year 4 300,000 If the project’s desired rate of return is 9.00%, the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT