Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The payback method helps firms establish and identify a maximum acceptable payback period that helys in their capital bedgeting dedsions. Consider the case of Cute

image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
The payback method helps firms establish and identify a maximum acceptable payback period that helys in their capital bedgeting dedsions. Consider the case of Cute Camel Woodcraf Company: Cute Camel Woodcraft Company is a small firm, and several of its managess are worried about how soon the firm will be able to recover its initial investment from Project Alpha's expected future cash flows. To answer this question, Cute Camel's Cro has asked that you compute the project's payback period using the following expected net cash flows and assuming that the cash flows are recelved 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 two dedmal places. If your answer is negative, be sure to use a minus sign in your answer.) 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 two decimal places. If your answer is negative, be sure to use a minus sign in your answec.) The corventional payback period lonores the time value of money, and this concerns Cute Came'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 cafculations. Round the discounted cash flow values to the nearest whole dollar, and the discounted payback period to two decimal places. For full credit, complete the entire table. (Note: If your answer is negative, be sure to use a minos sion in your answer.) The conventional payback period ignores the time value of money, and this concems Cute Camei's CFO. He has now anked 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 caloilations: Round the discounted cash flow values to the nearest whole dollar, and the discounted payback period to two decimal places. For full credit, complete the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.) Which version of a project's payback period should the Cro use when evaluating Project Alpha, given its theoretical superiority? The regular payback period The discounted payback period Which version of a project's payback period should the CFO use when evaluating Project Apha, given its theoretical superiority? The reqular payback period The discounted payback period One theoretical disadvantage of both payback methods-compared to the net present value method-is that they fall to consilder the value of the cash flows bevond the point in time equal to the payback period. How much value in this example does the discounted payback period method fail to recoonize due to this theoretical detidency? $4,529,607$1,696,274$2,916,953$1,250,286

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial management theory and practice

Authors: Eugene F. Brigham and Michael C. Ehrhardt

13th edition

1439078106, 111197375X, 9781439078105, 9781111973759, 978-1439078099

More Books

Students also viewed these Finance questions