7. The NPV and payback period Aa Aa What information does the payback period pro
ID: 2800438 • Letter: 7
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7. The NPV and payback period Aa Aa What information does the payback period provide? Suppose Extensive Enterprises's CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost; however, she does know that the project's regular payback period is 2.5 years. If the project's weighted average cost of capital (WACC) is 10%, what is its NPV? Year Cash Flow Year 1 $350,000 Year 2 $475,000 Year 3 $425,000 Year 4 $400,000 O $265,758 $212,606 $279,046 O $225,894 Which of the following statements indicate a disadvantage of using the discounted payback period for capita budgeting decisions? Check all that apply The discounted payback period does not take the time value of money into account. The discounted payback period does not take the project's entire life into account. The discounted payback period is calculated using net income instead of cash flows.Explanation / Answer
NPV = $265,758 initial cost = 350,000 + 475,000 + 425000/2 1,037,500.00 Statement showing Cash flows Particulars Time PVf 10% Amount PV Cash Outflows - 1.00 (1,037,500.00) (1,037,500.00) PV of Cash outflows = PVCO (1,037,500.00) Cash inflows 1.00 0.9091 350,000.00 318,181.82 Cash inflows 2.00 0.8264 475,000.00 392,561.98 Cash inflows 3.00 0.7513 425,000.00 319,308.79 Cash inflows 4.00 0.6830 400,000.00 273,205.38 PV of Cash Inflows =PVCI 1,303,257.97 NPV= PVCI - PVCO 265,757.97 The discounted Payback period does not take the projects entire life into account
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