One theoretical disadvantage of both payback methods-compared to the net present value method-is that they fail to consider the value of the cashflows beyond the point in time equal to the payback period.How much value in this example does the discounted payback period method fail to recognize due to this theoretical deficiency?$1,216,189O $4,435,615O $1,586,991$2,867,565 6. The payback periodThe payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions.Consider the case of Green Caterpillar Garden Supplies Inc.:Green Caterpillar Garden Supplies Inc. is a small firm, and several of its managers are worried about how soon the firm will be able torecover its initial investment from Project Alpha's expected future cash flows. To answer this question, Green Caterpillar's CFO has askedthat you compute the project's payback period using the following expected net cash flows and assuming that the cash flows arereceived evenly throughout each year.Complete the following table and compute the project's conventional payback period. For full credit, complete the entire table. (Note: Round theconventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.)Expected cash flowCumulative cash flowConventional payback period:Cash flow$Discounted cash flowCumulative discounted cash flowDiscounted payback period:Year 0-$4,500,000$$yearsYear 0-$4,500,000O The discounted payback periodThe regular payback period$The conventional payback period ignores the time value of money, and this concerns Green Caterpillar's CFO. He has now asked you to computeAlpha's discounted payback period, assuming the company has a 9% cost of capital. Complete the following table and perform any necessarycalculations. Round the discounted cash flow values to the nearest whole dollar, and the discounted payback period to two decimal places. For fullcredit, complete the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.)yearsYear 1$1,800,000$$$Year 1$1,800,000Year 2$3,825,000$$$Year 2$3,825,000Year 3$1,575,000$$Year 3$1,575,000Which version of a project's payback period should the CFO use when evaluating Project Alpha, given its theoretical superiority?

Regular payback period is simple the time required to required to recover initial amount of…

One theoretical disadvantage of both payback methods-compared to the net present value method is that they fail to consi flows beyond the point in time equal to the payback period. How much value in this example does the discounted payback period method fail to recognize due to this theoretical deficien $1,216,189 O $4,435,615 $1,586,991 O $2,867,565

One theoretical disadvantage of both payback methods-compared to the net present value method is that they fail to consi flows beyond the point in time equal to the payback period. How much value in this example does the discounted payback period method fail to recognize due to this theoretical deficien $1,216,189 O $4,435,615 $1,586,991 O $2,867,565

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 8Q

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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…