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Alemas Score: 14 7. The payback period The payback method help firms establish and identify a maximum acceptable payback period that helps in their capital
Alemas Score: 14 7. The payback period The payback method help firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions Consider the case of Green Caterpillar Garden Supplies Inc.: Green Caterpillar Garden Supplies Inc. is a small fiem, and several of its managers are worried about how soon the firm wil be able to recover its initial investment from Project Alpha's expected future cash flow. To answer this question, Green Caterpillar'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 the nearest two decimal places. If your answer is negative use a minus sign.) Year o $4,500,000 Year 1 $1,800,000 Year 2 53,825,000 Year 3 51,525,000 Expected cash flow Cumulative cash flow Conventional payback periodi years The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to compute Alpha's discounted payback period, assuming the company has a 9% 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 For full credit, complete the entire table. (Note: If your answer is negative use a minus sign.) Year o 54,500,000 Year 1 $1,800,000 Year 2 53,825,000 Year 3 51,525,000 Cash now Discounted cash flow Currulative discounted cash now Discounted payback period: Is Which on of a projects period should the CFO use when roject Alpha is theoretical Sup The discounted payback period The regular payback period One theoretical disadvantage of both payback methods-compared to the net present value method is that they fail to consider the value of the cash flows beyond the point in time equal to the payback period. How much value does the discounted payback period method fail to recognize due to this theoretical deficiency? O 54.435,615 O $1,216,188 O $2.862,565 O $1,586,993
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