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 initial cost, but you do know the project's regular payback period is 2.5 years. If the project's WACC is 7%, the project's NPV is which of the following? $420, 060 $504, 072 $357, 051 $483, 069 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 project's entire life into account. The payback period does not take the time value of money into account.

Explanation / Answer

Payback Period = 2.5 years

Therefore initial investment = 375000+475000+450000/2

= 375000+475000+225000 i.e 1075000

2) The Payback period does not take the time value of money into account

Particulars Year Cash Flows PVF @ 7% PV Initial Investment 0 -1075000               1.00      (1,075,000.00) Cash Inflows 1 375000               0.93            350,467.29 Cash Inflows 2 475000               0.87            414,883.40 Cash Inflows 3 450000               0.82            367,334.04 Cash Inflows 4 475000               0.76            362,375.23 Net Present Value            420,059.96

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