Cute Camel Company 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 Delta's expected future cash flows. To answer this question Cute Caramel's CFO has asked that you compute the projects payback period using the following expected net cash flows and assuming that the cash are received evenly throughout each year.
Complete the following table and compute the project’s conventional payback period
Year 0 Year 1 Year2 Year3
Expected Cash Flow -5,500,000 2,200,000 4,675,000 1,925,000
Culmulative Cash Flow ?
Conventional Payback Period ?
The conventional payback period ignores the time value of money and this concerns Cute Caramel's CFO. He has now asked you to compute Delta's discounted payback period assuming the company has a 8% cost of capital. Complete the following table and perform any necessary calculations. Round the discounted cash flow values to the nearest whole dollar and the discounted payback period to two decimal places
Use the same cash flow table from above. Please show work
One theoretical disadvantage of both payback methods compared to the net present value method is that they fail to consider the value of the cash flows beyond the point in time equal to the pay back period
How much value does the discounted payback period method fail to recognize due to this theoretical deficiency?