The conventional payback period ignores the time value of money
Question # 00245102
Posted By:
Updated on: 04/10/2016 02:57 PM Due on: 05/10/2016
The conventional payback period ignores the time value of money, and this concerns Blue Hamster's CFO. He has now asked to compute Alpha's discounted payback period,assuming the company has a 9% cost of capital. complete the table.
Year 0 Year 1 Year 2 Year 3
Cash flow -5000000 2,000,000 4,250,000 1,750,000
Discounted cash flow ? ? ? ?
Cumulated discounted cash flow ? ? ? ?
Discounted payback period ?
How much value does the discounted payback period method fail to recognize due to this theoretical deficiency?
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Rating:
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Solution: The conventional payback period ignores the time value of money