7. The NPV and payback period
What information does the payback period provide?
Suppose Omni Consumer Products’s CFO is evaluating a projectwith the following cash inflows. She does not know the project’sinitial cost; however, she does know that the project’s regularpayback period is 2.5 years.
Year | Cash Flow |
|---|
| Year 1 | $275,000 |
| Year 2 | $450,000 |
| Year 3 | $475,000 |
| Year 4 | $400,000 |
If the project’s weighted average cost of capital (WACC) is 8%,what is its NPV?
$331,563
$349,014
$401,366
$279,211
Which of the following statements indicate a disadvantage ofusing the discounted payback period for capital budgetingdecisions? Check all that apply.
The discounted payback period does not take the project’s entirelife into account.
The discounted payback period is calculated using net incomeinstead of cash flows.
The discounted payback period does not take the time value ofmoney into account.
