Cute Camel Woodcraft Company is a small company, and several of its managers are concerned about how
Question:
Cute Camel Woodcraft Company is a small company, and several of its managers are concerned about how quickly the company will be able to recoup its initial investment from the expected future cash flows from Project Omega. To answer this question, Cute Camel's CFO has asked you to calculate the payback period for the project using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year.
1. Complete the following table and calculate the conventional payback period of the project.
year 0 | Year 1 | year 2 | year 3 | |
---|---|---|---|---|
expected cash flow | $-5,000,000 | $2,000,000 | $4,250,000 | $1,750,000 |
cumulative cash flow | ps | ps | ps | ps |
Conventional payback period: |
The conventional payback period ignores the time value of money, and this worries Cute Camel's CFO. He has now asked you to calculate Omega's discounted payback period, assuming the company has a 9% cost of capital .
2. Complete the following table and perform the necessary calculations . 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 fill in the entire table, even if the values are above the point at which the cost of the project is recovered.
year 0 | Year 1 | year 2 | year 3 | |
Cash flow | $-5,000,000 | $2,000,000 | $4,250,000 | $1,750,000 |
discounted cash flow | ||||
Cumulative Discounted Cash Flow | ||||
Discounted payback period |
3. Which version of a project's payback period should the CFO use when evaluating Project Omega, given its theoretical superiority?
A. the discounted payback period
B. the regular recovery period
4. How much value does the discounted payback method not recognize because of this theoretical deficiency?
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher