7. The NPV and payback period What information does the payback period provide? Suppose Praxis Corporation's CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost; however, she does know that the project's regular payback period is 2.5 years. Year Cash Flow Year 1 $350,000 Year 2 $475,000 Year 3 $475,000 Year 4 $400,000 If the project's weighted average cost of capital (WACC) is 10%, what is its NPV? $278,324 $333,989 $292,240 $236,575 Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply. ☐ The discounted payback period does not take the project's entire life into account. The discounted payback period does not take the time value of money into account. The discounted payback period is calculated using net income instead of cash flows. ☐
7. The NPV and payback period What information does the payback period provide? Suppose Praxis Corporation's CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost; however, she does know that the project's regular payback period is 2.5 years. Year Cash Flow Year 1 $350,000 Year 2 $475,000 Year 3 $475,000 Year 4 $400,000 If the project's weighted average cost of capital (WACC) is 10%, what is its NPV? $278,324 $333,989 $292,240 $236,575 Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply. ☐ The discounted payback period does not take the project's entire life into account. The discounted payback period does not take the time value of money into account. The discounted payback period is calculated using net income instead of cash flows. ☐
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:7. The NPV and payback period
What information does the payback period provide?
Suppose Praxis Corporation's CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost; however, she
does know that the project's regular payback period is 2.5 years.
Year
Cash Flow
Year 1 $350,000
Year 2 $475,000
Year 3
$475,000
Year 4 $400,000
If the project's weighted average cost of capital (WACC) is 10%, what is its NPV?
$278,324
$333,989
$292,240
$236,575
Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that
apply.
☐
The discounted payback period does not take the project's entire life into account.
The discounted payback period does not take the time value of money into account.
The discounted payback period is calculated using net income instead of cash flows.
☐
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