Green Caterpillar Garden Supplies 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 Alpha'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 by computing the project's conventional payback period. (Hint: For full credit, complete the entire table. Round the onventional payback period to the nearest two decimal places. If your answer is negative use a minus sign.) Expected cash flow Cumulative cash flow Year 0 -$5,000,000 $ Year 1 $2,000,000 Year 2 $4,250,000 Year 3 $1,750,000 Conventional payback period: years The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to compute Alpha's discounted payback period, assuming the company has a 10% cost of capital. Complete the following table and perform any necessary calculations. (Hint: Round the discounted cash flow values to the nearest whole dollar, and Che discounted payback period to the nearest two decimal places. For full credit, complete the entire table. If your answer is negative use a minus sign.) Cash flow Year 0 -$5,000,000 Discounted cash flow $ Cumulative discounted cash flow $ Discounted payback period: years Year 1 $2,000,000 Year 2 $4,250,000 $ Year 3 $1,750,000 Which version of a project's payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority? O The discounted payback period O The regular payback period One theoretical disadvantage of both payback methods-compared to the net present value method-is that they fail to consider the value of the cash flows beyond the point in time equal to the payback period. How much value does the discounted payback period method fail to recognize due to this theoretical deficiency? O $1,645,380 O $3,132,983 O $4,827,198 O $1,314,801
Green Caterpillar Garden Supplies 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 Alpha'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 by computing the project's conventional payback period. (Hint: For full credit, complete the entire table. Round the onventional payback period to the nearest two decimal places. If your answer is negative use a minus sign.) Expected cash flow Cumulative cash flow Year 0 -$5,000,000 $ Year 1 $2,000,000 Year 2 $4,250,000 Year 3 $1,750,000 Conventional payback period: years The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to compute Alpha's discounted payback period, assuming the company has a 10% cost of capital. Complete the following table and perform any necessary calculations. (Hint: Round the discounted cash flow values to the nearest whole dollar, and Che discounted payback period to the nearest two decimal places. For full credit, complete the entire table. If your answer is negative use a minus sign.) Cash flow Year 0 -$5,000,000 Discounted cash flow $ Cumulative discounted cash flow $ Discounted payback period: years Year 1 $2,000,000 Year 2 $4,250,000 $ Year 3 $1,750,000 Which version of a project's payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority? O The discounted payback period O The regular payback period One theoretical disadvantage of both payback methods-compared to the net present value method-is that they fail to consider the value of the cash flows beyond the point in time equal to the payback period. How much value does the discounted payback period method fail to recognize due to this theoretical deficiency? O $1,645,380 O $3,132,983 O $4,827,198 O $1,314,801
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
Related questions
Question
Transcribed Image Text:helps in their capital budgeting decisions.
Green Caterpillar Garden Supplies 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 Alpha'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 by computing the project's conventional payback period. (Hint: For full credit, complete the entire table. Round the
conventional payback period to the nearest two decimal places. If your answer is negative use a minus sign.)
Expected cash flow
Cumulative cash flow
Year 0
-$5,000,000
$
Year 1
$2,000,000
Year 2
Year 3
$4,250,000
$1,750,000
$
Conventional payback period:
years
The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to compute
Alpha's discounted payback period, assuming the company has a 10% cost of capital.
Complete the following table and perform any necessary calculations. (Hint: Round the discounted cash flow values to the nearest whole dollar, and
the discounted payback period to the nearest two decimal places. For full credit, complete the entire table. If your answer is negative use a minus
sign.)
Year 1
$2,000,000
$
$
years
Year 0
Cash flow
-$5,000,000
Discounted cash flow
$
Cumulative discounted cash flow
Discounted payback period:
Year 2
$4,250,000
Year 3
$1,750,000
Which version of a project's payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority?
O The discounted payback period
O The regular payback period
One theoretical disadvantage of both payback methods-compared to the net present value method-is that they fail to consider the value of the cash
flows beyond the point in time equal to the payback period.
How much value does the discounted payback period method fail to recognize due to this theoretical deficiency?
O $1,645,380
O $3,132,983
O $4,827,198
O $1,314,801
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education