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The conventional payback period ignores the time value of money, and this concerns Fuzzy Button’s CFO....

The conventional payback period ignores the time value of money, and this concerns Fuzzy Button’s CFO. He has now asked you to compute Alpha’s discounted payback period, assuming the company has a 7% 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 the nearest two decimal places. Again, be sure to complete the entire table—even if the values exceed the point at which the cost of the project is recovered.

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 Alpha, given its theoretical superiority?

The regular payback period

The discounted payback period

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