6. The NPV and payback period

What information does the payback period provide?

Suppose Praxis Corporations CFO is evaluating a project with the following cash inflows. She does not know the projects initial cost; however, she does know that the projects regular payback period is 2.5 years.

Year	Cash Flow
Year 1	$300,000
Year 2	$475,000
Year 3	$500,000
Year 4	$500,000

If the projects weighted average cost of capital (WACC) is 7%, what is its NPV?

$367,883

$413,869

$390,876

$459,854

Which of the following statements indicate a disadvantage of using the discounted payback period for capital 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 projects entire life into account.

The discounted payback period is calculated using net income instead of cash flows.

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