11. The payback period The payback method helps firms establish and identify a maximum acceptable payback period that helps in capital budgeting decisions. There are two versions of the payback method: the conventional payback method and the discounted payback method Consider the following case Fuzzy Button Clothing Company 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, Fuzzy Button's CFO hs 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. Round the payback period to the nearest two decimal places. Be sure to complete the entire table-even if the values exceed the point at which the cost of the project is recovered. Year 0 Year 1 Year 2 Year 3 Expected cash flow Cumulative cash flow Conventional payback period: $-5,000,000 $2,000,000 $4,250,000 $1,750,000 years The conventional payback period ignores the time value of money, and this concerns Fuzzy Button's CFO. He has now asked you to compute Beta'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. Again, be sure to complete the entire table-even if the values exceed the point at which the cost of the project is recovered Year 0 Year 1 Year 2 Year 3 $-5,000,000 $2,000,000 $4,250,000 $1,750,000 Cash flow Discounted cash flow Cumulative discounted cash flow Discounted payback period years Which version of a project's payback period should the CFO use when evaluating Project Beta, given its theoretical superiority? The discounted payback period The regular payback period 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 net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. The project's annual cash flows are: Year Cash Flow Year 1 $275,000 Year 2 600,000 Year 3 600,000 Year 4450,000 If the project's desired rate of return is 8.00%, the project's NPV-rounded to the nearest whole dollar-is Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply. The payback period does not take into account the cash flows produced over a project's entire life. The discounted payback period does not take into effect the time value of money effects of a project's cash flows The discounted payback period is calculated using net income instead of cash flows