$7.$ The NPV and payback period

What information does the payback period provide?

Suppose you are evaluating a project with the expected future 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 $2\mathrm{.}50$ years.

Year

Cash Flow

Year $1$ $$375,000$

Year $2$ $$450,000$

Year $3$ $$425,000$

Year $4$ $$400,000$

If the project$$s weighted average cost of capital $($WACC$)$ is $9\%,$ the project$$s NPV $($rounded to the nearest dollar$)$ is:

$$237,473$

$$341,367$

$$281,999$

$$296,841$

Which of the following statements indicate a disadvantage of using the regular payback period $($not the discounted payback period$)$ for capital budgeting decisions? Check all that apply.

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

The payback period does not take the project$$s entire life into account.

The payback period does not take the time value of money into account.