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

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Finance

7. The NPV and payback period
What information does the payback period provide?
Suppose you are evaluating a project with the expected futurecash inflows shown in the following table. Your boss has asked youto calculate the project’s net present value (NPV). You don’t knowthe project’s initial cost, but you do know the project’s regular,or conventional, payback period is 2.50 years.
Year
Cash Flow
Year 1 $275,000
Year 2 $500,000
Year 3 $450,000
Year 4 $450,000
If the project’s weighted average cost of capital (WACC) is 9%,the project’s NPV (rounded to the nearest dollar) is:
a.$288,496
b.$305,466
c.$407,288
d.$339,407
Which of the following statements indicate a disadvantage ofusing the regular payback period (not the discounted paybackperiod) for capital budgeting decisions? Check all that apply.
a.The payback period is calculated using net income instead ofcash flows.
b.The payback period does not take the time value of money intoaccount.
c.The payback period does not take the project’s entire lifeinto account.

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4.0 Ratings (810 Votes)

Net Present Value NPV of the Project The Net Present Value of the Project Present Value of annual cash inflows Initial Investments Present Value of annual cash inflows Year Net Cash Flow Present Value factor at 9 Present Value of Cash Flow 1 275000 0917431 See Answer

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7. The NPV and payback periodWhat information does the payback period provide?Suppose you are evaluating a project with the expected futurecash inflows shown in the following table. Your boss has asked youto calculate the project’s net present value (NPV). You don’t knowthe project’s initial cost, but you do know the project’s regular,or conventional, payback period is 2.50 years.YearCash FlowYear 1$275,000Year 2$500,000Year 3$450,000Year 4$450,000If the project’s weighted average cost of capital (WACC) is 9%,the project’s NPV (rounded to the nearest dollar) is:a.$288,496b.$305,466c.$407,288d.$339,407Which of the following statements indicate a disadvantage ofusing the regular payback period (not the discounted paybackperiod) for capital budgeting decisions? Check all that apply.a.The payback period is calculated using net income instead ofcash flows.b.The payback period does not take the time value of money intoaccount.c.The payback period does not take the project’s entire lifeinto account.