The conventional payback period ignores the time value of money, and this concer
ID: 2745365 • Letter: T
Question
The conventional payback period ignores the time value of money, and this concerns Blue Hamster's CFO. He has now asked you to compute Omega's discounted payback period, assuming the company has a 7% 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, complete the entire table. Which version of a project's payback period should the CFO use when evaluating Project Omega, given its theoretical superiority? The regular payback period The discounted 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, 142, 817 $2, 638, 144 $1, 607, 836Explanation / Answer
Solution.
Calculation of discounted Payback period.
Pay-back period = 1 year + ( $2,505,600 / $2,968,200 )
= 1.84 year.
2.
The discounted payback period is more accurate than simple pay-back period.
3.
This is the value which discounted pay-back period fail to recognised.
Year Cashflow Table value Discounted cashflow Cumulative DCF 0 (4,000,000.00) 1.000 (4,000,000.00) (4,000,000) 1 1,600,000.00 0.934 1,494,400.00 (2,505,600) 2 3,400,000.00 0.873 2,968,200.00 462,600 3 1,400,000.00 0.816 1,142,400.00 1,605,000Related Questions
Hire Me For All Your Tutoring Needs
Integrity-first tutoring: clear explanations, guidance, and feedback.
Drop an Email at
drjack9650@gmail.com
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.