7. The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. Year Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 $475,000 $425,000 $475,000
7. The NPV and payback period What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. Year Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 $475,000 $425,000 $475,000
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 you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the
project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is
2.50 years.
Year
Year 1
Year 2
Year 3
Year 4
If the project's weighted average cost of capital (WACC) is 10%, the project's NPV (rounded to the nearest dollar) is:
O
O
Cash Flow
$325,000
$475,000
$425,000
$475,000
0
0
$351,183
$367,146
Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital
budgeting decisions? Check all that apply.
$319,257
$303,294
The payback period is calculated using net income instead of cash flows.
The payback period does not take the project's entire life into account.
The payback period does not take the time value of money into account.
Expert Solution
Step 1
Payback method
The simple and easiest method of calculating the profitability of a project is known as the payback period method. Under this method, the profitability of a project is identified when the project recovers its initial investments. Lesser time taken is more profitable.
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