Suppose you are evaluating a project with the cash inflows shown in the followin

Question

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 NPV. You don't know the project's initial cost, but you do know the project's regular payback period is 2.5 years. If the project's WACC is 8%, the project's NPV is which of the following? $374, 523 $430, 701 $337, 071 $299, 618 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. The payback period does not take the time value of money into account. The payback period is calculated using net income instead of cash flows. The payback period does not take the project's entire life into account.

Explanation / Answer

As the payback period is 2.5 years the initial money of the project would be:

=275000+400000+(0.5*475000)= 912500

For NPV:

=-912500+(275000/1.08)+(400000/1.08^2)+(475000/1.08^3)+(425000/1.08^4)

=374523

The regular payback method does not consider the time value of money

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