The Basis of Capital Budgeting

7. The payback period Aa Aa The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions Consider this case: Fuzzy Button Clothing Company is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Sigma's expected future cash flows. To answer this question, Fuzzy Button'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. Year 0 Year 1 Year 2 Year 3 Expected cash flow Cumulative cash flow -6,000,000 $2,400,000 $5,100,000 $2,100,000 Conventional payback period