The conventional payback period ignores the time value of money, and this concer

Question

The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to compute Alpha's discounted payback period, assuming the company has a 10% 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. For full credit, complete the entire table. Which version of a project's payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority? The discounted payback period 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 beyond the point in time equal to the payback period. How much value does the discounted payback period method fail to recognize due to this theoretical deficiency? $1,314,801 $3,132,983 $4,827,198 $1,645,380

Explanation / Answer

NPV of the project = -5,000,000+1,818,182+3,512,397+1,314,801 = $1,645,380

This is the value, discount payback period fail to recognize. So, option 4 is correct.

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