What information does the payback period provide? Suppose you are evaluating a p

Question

What information does the payback period provide? 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 metal cost, but you do know the project's regular payback period is 2.5 years. If the project's WACC is 10%, the project's NPV is which of the following? $288.945 $303, 392 $260, 051 $274, 498 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 is calculated using net income instead of cash flows. The payback period does not take the time value of money into account. The payback period does not take the project's entire life into account.

Explanation / Answer

If the project has payback period of 2.5 years then

=500,000/2 =250,000

Then total cost is = 250,000+450,000+350,000= 1050,000

The NPV of the project is given by =-105000 + 350000/1.12 + 450,000/1.12^2 + 500,000/1.12^3 +400,000/1.12^4

= 262677.66

The answer would be as follows : payabck does not take time value of moeny into account

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