he conventional payback period ignores the time value of money, and this concerns Blue Hamster's CFO. He
Question:
he conventional payback period ignores the time value of money, and this concerns Blue Hamster's CFO. He has now asked you to compute Omega's discounted payback period, assuming the company has a 8% cost of capital. Complete the following table and perform any necessary calculations. For full credit, complete the entire table.
Note: If your answer is negative use a minus sign. Round the discounted cash flow values to the nearest whole dollar, and the discounted payback period to the nearest two decimal places.
Year 0 | Year 1 | Year 2 | Year 3 | |
---|---|---|---|---|
Cash flow | -$4,500,000 | $1,800,000 | $3,825,000 | $1,575,000 |
Discounted cash flow | ||||
Cumulative discounted cash flow | ||||
Discounted payback period: | years |
Which version of a project's payback period should the CFO use when evaluating Project Omega, given its theoretical superiority?
How much value does the discounted payback period method fail to recognize due to this theoretical deficiency?