The payback method helps firms establish and identify a maximum acceptable payback period that helps...
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The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Green Caterpillar Garden Supplies Inc. Green Caterpillar Garden Supplies Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Omega's expected future cash flows. To answer this question, Green Caterpillar's CFO has asked that you compute the project's payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table Year Year 1 Year 2 Year 3 4,500,000 $1,800,000 $3,825,000 $1,575,000 Expected cash flow Cumulative cash flow Conventional payback period The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to compute Omega's discounted payback period, assuming the company has a 8% cost of capital
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