6. The NPV and payback period What information does the payback period method provide? The payback period method indicates the number of years it is expected to take for a project to recover its initial investment based on the operating cash flows that the project is expected to generate. Criticisms of the conventional model resulted in its evolution and improvement to incorporate the effects of the time value of money. This produced the discounted payback method. Both the conventional and discounted payback methods still exhibit an important deficiency that can result in faulty project rankings, but both methods can also provide important information about an individual project's liquidity and risk. The the payback, other things constant, the greater the project's liquidity 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. Year Cash Flow Year 1 $300,000 Year 2 500,000 Year 3 400,000 Year 4 475 000 If the project's WACC is 9.00%, the project's NPV is (rounded to the nearest whole dollar)