7. The payback period Aa Aa The payback method helps firms establish and identif

Question

7. The payback period Aa Aa The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions Consider the case of Blue Hamster Manufacturing Inc.: Blue Hamster Manufacturing 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 Alpha's expected future cash flows. To answer this question, Blue Hamster's CFO has asked that you compute the project's payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Start your school or career port Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. Year 0 Year 1 Year 2 Year 3 Expected cash flow Cumulative cash flow -4,000,000 $1,600,000 $3,400,000 $1,400,000 Conventional payback period:

Explanation / Answer

Payback period = A + B/C

Where,
A = Last period with a negative cumulative cash flow;
B = Absolute value of cash flow at the end of the period A;
C = cash flow during the period after A.

1.

Payback period = 1 + 2400000/3400000 = 1.71 years

Discounted payback period

DPB = 1 + 2518518.52/2914951.99 = 1.86 years

3. Discounted payback period method should be used as it consideres the discounted cash flows.

4. Option 4 - 1507798, this is the terminal value of the discounted payback period method. Becasue the method assumes there are no cashflows after the last value.

Year Cashflow (A) Cumulative cashflow 0 -4000000.00 -4000000.00 1 1600000.00 -2400000.00 2 3400000.00 1000000.00 3 1400000.00 2400000.00

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