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:
If the project’s desired rate of return is 10.00%, the project’s NPV—rounded to the nearest whole dollar—is .
Which of the following statements indicates a disadvantage of using the regular, or conventional, payback period for capital budgeting decisions? Check all that apply.
The payback period is calculated using net income instead of cash flows.
The payback period does not take into account the cash flows produced over a project’s entire life.
The payback period does not take into account the time value of money effects of a project’s cash flows.
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