The payback method firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions.

Consider the case of cold goose metal works inc

Cold Goose Inc is a small firm and several of its managers are worried about how soon the firm will be able to recover it initial investment from project alphas expected future cash flows. To answer this question, cold gooses CFO has asked that you compute the projects payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year.

1.Complete the following table and compute the projects conventional payback period, for full credit complete entire table

year 0 Year 1 year 2 year 3

expected cash flow -5,500,000 2,200,000 4,675,000 1,925,000

cumulative cash flow ? ? ? ?

Conventional Payback Period: ?

2.The conventional payback period ignores the time value of money, and this concerns cold gooses CFO. He has now asked you to compute alphas discounted payback period, assuming the company has a 7% cost of capital. Complete the following table and perform any neccesary 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 table.

year 0 year 1 year 2 year 3

Cash flow -5,500,000 2,200,000 4,675,000 1,925,000

Discounted Cash flow ? ? ? ?

Cumulative discounted cash flow ? ? ? ?

discounted payback period ?

3.Which version of a projects payback period should the cfo use when evaluating project alpha, given its theoretical superiority?

a) the regular payback period

b) the discounted payback period

4.One theoretical disadvatage of both oayback methods compared to the npv method is that they fail to consider the value of the cash flows beyond the point in the time equal to the payback period. How much value does the discounted payback period method fail to recognize due to theoretical defficiency?

a) 2,210,774

b) 5,654,699

c) 3,627,448

d) 1,571,373