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File Edit View History Bookmarks People Window Help MindTap- Cengage Learning ng.cengage.com/static/nb/ui/index.htmi?nbld-3250468nbNodeld-1068570518deploymentid 473802859548 MindTap Assignment 11 - The Basics of Capital Budgeting ng.cengage.com/static Due Today 11:59 PM COT firms establish and identify a maximum acceptable payback period that helps in their The payback method helps capital budgeting decisions Consider this case: Cold Goose Metal Works Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial Investment from Project Sigma's expected future cash flows. To answer this question, Cold Goose's CFO has asked that you compute the project's payback period using the t and assuming that the cash flows are received evenly throughout each year expected net cash flows Complete the following table and compute the projects entire table. following table and compute the project's conventional payback period. For full credit, complete the Year o Year 1 Year 2 Year 3 4,500,000$1,800,000 $3,825,000$1,575,000 Expected cash flow Cumulative cash flow Conventional payback period: The conventional payback period ignores the time value of money, and this concerns asked Cold Goose's CFO. He has now 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 ar and the discounted pavback period to the nearest two decimal olaces. For full credit. Lr

Explanation / Answer

Compute the project’s conventional payback period:

Details

Year 0

Year 1

Year 2

Year 3

Expected cash flow

$ (4,500,000)

$   1,800,000

$ 3,825,000

$ 1,575,000

Cumulative cash flow

$ (4,500,000)

$ (2,700,000)

$ 1,125,000

$ 2,700,000

Conversational payback period = 1.706 years

Calculate the discounted payback period:

Details

Year 0

Year 1

Year 2

Year 3

Expected cash flow

$ (4,500,000)

$   1,800,000

$ 3,825,000

$ 1,575,000

Discounting factor @10%

1

0.90909

0.82645

0.75131

Discounting cash flows

$ (4,500,000)

$   1,636,362

$ 3,161,171

$ 1,183,313

Cumulative discounted cash flows

$ (4,500,000)

$ (2,863,638)

$     297,533

$ 1,480,847

Conversational payback period = 1.906 years

The without discounted payback period is should the CFO use when evaluating project sigma.

The amount of $1,480,842 discounted payback period method fail to recognize due to theoretical deficiency.

Details

Year 0

Year 1

Year 2

Year 3

Expected cash flow

$ (4,500,000)

$   1,800,000

$ 3,825,000

$ 1,575,000

Cumulative cash flow

$ (4,500,000)

$ (2,700,000)

$ 1,125,000

$ 2,700,000

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