The payback method helps 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 firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Delta's expected future cash flows. 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.

Year 0 Year 1 Year 2 Year 3

Expected cash flow -6,000,000 $2,400,000 $5,100,000 $2,100,000

Cumulative Cash flow ________ ________ _________ _________

Conventional payback period ________

The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to compute Delta's discounted payback period/ assuming the company has a 7% cost of capital.Complete the following table and perform any necessary calculations. Round the discounted cash flow values to thenearest 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 flow -6,000,000 $2,400,000 $5,100,000 $2,100,000

Discounted cash flow _________ ________ _________ _________

Cumulative discounted cash flow __________ _______ _________ _________

Discounted payback period: __________

Which version of a project's payback period should the CFO use when evaluating Project Delta, given its theoretical

superiority? The regular payback period or The discounted 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?

1,714,226 or 3,957,217 or 2,411,755 or 6,168,764