Chapter 9 Assignment 11. The payback period The payback method helps firms establish and identify a maximum acceptable payback period that helps in capital budgeting decisions. There are two versions of the payback method the conventional payback method and the discounted payback method. Consider the following case: Blue Hamster Manufacturing 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 Alpha's expected future cash flows. To answer this question. Blue Hamster'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. Round the payback period to the nearest two decal places. Be sure to complete the entire table-even if the values exceed the point at which the cost of the project is recovered. Year 2 Year 3 Year o 3-5,000,000 Year 1 $2,000,000 54.250.000 $1.750,000 Expected cash flow Cumulative cash flow Conventional payback penodi Years The conventional payback period ignore the time value of money, and this concerns Blue Hamster's CFO. He has now asked you to compute Alpha's discounted payback period, assuming the company has a 7% cost of capital Comple the following table and perform any necessary calculacions. Round the discounted cash flow values to the nearest whole dollar, and the discounted payback period to the nearest two decimal places. Again, be sure to complete the entire table-even if the values exceed the point at which the cost of the project is recovered Year o Year 2 Year 1 $2.000.000 Year $1.750,000 3-5,000,000 54,250,000 Cash Flow Discounted cash flow Cumulative discounted cash flow Discounted pwyback periodu yean Which version of a project's payback period should the CFO use when evaluating Project Alpha given its theoretical superiority? The regular payback period