ch 11 assignment the basics of capital budgeting 6 the payback period

Question

Ch 11- Assignment - The Basics of Capital Budgeting
6. The payback period
The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions.
Consider the case of Cold Goose Metal Works Inc.
Cold Goose Metal Works 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 Beta's expected future cash flows. To answer this question, Cold Goose'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
Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. (Note: Round the
conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.)
Expected cash flow
Cumulative cash flow
Conventional payback period:
Expected cash flow
Cumulative cash flow
Conventional payback period:
Year 0
-$4,500,000
Cash flow
Discounted cash flow
Cumulative discounted cash flow
Discounted payback period:
The conventional beback period ionores the time value of mones, and this concerns Cold Goose's CFO. He has now asked you to compute beta's
Ch 11- Assignment - The Basics of Capital Budgeting
Year
-$4,500,000
Year 1
$1,800,000
Year o
-$4,500,000
Year 1
$1,800,000
Year 2
$3,425,000
Year 1
$1,800,000
Year 2
$3,825,000
The conventional payback period ignores the time value of money, and this concerns Cold Goose's CFO. He has now asked you to compute Beta's
discounted payback period, assuming the company has a 5% 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 two decimal places. For full credit, complete
the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.)
Year 3
$1,575,000
Year 2
$3,825,000
Year 3
$1,575,000
Year 3
$1,575,000
Which version of a project's perback period should the CFO use when evaluating Project Bets, given its theoretical superiority?
The regular payback period
O The discounted payback period