The conventional payback period ignores the time value of money, and this concerns Fuzzy Buttons...
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The conventional payback period ignores the time value of money, and this concerns Fuzzy Buttons CFO. He has now asked you to compute Alphas 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 the nearest whole dollar, and the discounted payback period to the nearest two decimal places. Again, be sure to complete the entire tableeven if the values exceed the point at which the cost of the project is recovered.
| Year 0 | Year 1 | Year 2 | Year 3 | |
|---|---|---|---|---|
| Cash flow | $-5,000,000 | $2,000,000 | $4,250,000 | $1,750,000 |
| Discounted cash flow |
|
|
|
|
| Cumulative discounted cash flow |
|
|
|
|
| Discounted payback period: | years |
Which version of a projects payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority?
The regular payback period
The discounted payback period
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