The three potential flaws with regular payback method and whether the discounted payback method corrects all three flaws. Introduction: Payback Period: It refers to the time period that is required to get an amount invested in a project with some return on it. In other words, it is the time that a project takes to repay the amount invested with some return attached to it. Discounted Payback Period: It refers to the time that a project takes to repay the amount invested with some return attached to it after considering the time value of money or discounted cash flows.

Question

The Fortune Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 24 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $ 28,000 Sales revenue $ 14,500 $ 15,000 $ 15,500 $ 12,500 Operating costs 3,100 3,200 3,300 2,500 Depreciation 7,000 7,000 7,000 7,000 Net working capital spending 340 390 440 340 ?

Answer 1

Question

Chapter 11, Problem 2Q

Summary Introduction

To explain: The three potential flaws with regular payback method and whether the discounted payback method corrects all three flaws.

Introduction:

Payback Period:

It refers to the time period that is required to get an amount invested in a project with some return on it. In other words, it is the time that a project takes to repay the amount invested with some return attached to it.

Discounted Payback Period:

It refers to the time that a project takes to repay the amount invested with some return attached to it after considering the time value of money or discounted cash flows.

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