I am really struggling with calculating discounted cash flow for this problem - I have attached my homework and then the answer to a homework that is very similar, just a different cost of a capital percentage. It doesn't explain how to do the calculations, though.
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 8% cost of capital. Complete the following table and perform any necessary calculations. Round the discounted cash ow values to the nearest whole dollar, and the discounted payback period to the nearest two decimal places. For full credit, complete the entire table. Year 0 Year 1 Year 2 Year 3 Cash ow 6,000,000 $2,400,000 $5,100,000 $2,100,000 Cumulative discounted cash ow |:| |:| |:| Discounted payback period: |:| Year 0 Year 1 Year 2 Year 3 Cash flow 5,000,000 $2,000,000 $4,250,000 $1,750,000 Discounted cash flow 5,000,000 1,834,862 3,577,140 1,351,321 Cumulative discounted cash ow I -5,000,000 1| 3,165,138 1 I 412,002 1 T Discounted payback period: 1.88 years Explanation: Close A Project Alpha has a discounted payback period of 1.88 years. The discounted payback period provides the same information as the conventional (or regular) payback period, except it adjusts the expected future cash flows for their time value. Remember, according to the concept of the time value of money, cash ows expected to occur in the far future are worth less than cash ows expected to occur in the near future. Cold Goose's cash ows should be discounted using its 9% cost of capital. The discounted payback period indicates the amount of time necessary to recoup a project's initial investment when the discounted expected future cash ows are used. The present value of each cash ow is calculated and used to determine the cumulative discounted cash ows. The discounted payback period occurs when the project breaks even on a discounted cash ow basis. Year 0 Year 1. Year 2 Year 3 Cash ow S,000,000 $2,000,000 $4,250,000 $1,750,000 Discounted cash flow 5,ooo,ooo $1,834,862 $3,577,140 $1,351,321 Cumulative discounted cash ow 5,DO0,000 -$3,165,138 $412,002 Based on mese cash ows, the discounted payback period is calculated as: $3.165,138 Discounted payback penod $3, 577' 140 1.88 years
