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7. The NPV and payback period What information does the payback period provide? Suppose you...

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Accounting

7. The NPV and payback period

What information does the payback period provide?

Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the projects net present value (NPV). You dont know the projects initial cost, but you do know the projects regular, or conventional, payback period is 2.50 years.

Year

Cash Flow
Year 1 $325,000
Year 2 $425,000
Year 3 $500,000
Year 4 $425,000

If the projects weighted average cost of capital (WACC) is 10%, the projects NPV (rounded to the nearest dollar) is:

$343,895

$281,369

$359,527

$312,632

Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply.

The payback period does not take the time value of money into account.

The payback period does not take the projects entire life into account.

The payback period is calculated using net income instead of cash flows.

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