Answer and Explanation:
1. The computation is shown below:-
<u>Year 0 Year 1 Year 2 Year 3
</u>
Expected Cash flow ($6,000,000) $2,400,000 $5,100,000 $2,100,000
Cumulative Cash
flow ($6,000,000) ($3,600,000) $1,500,000 $3,600,000
Conventional Payback
Period 1 0.71
For the computation of cumulative cash flow for the first year, we simply deduct expected cash flow the Year 0 from Year 1 for the second year we added the Cumulative cash flow of year 1 with the expected cash flow of year 2 and for third year we added Expected cash flow of year 3 with a cumulative cash flow of year 2
and for conventional payback period for year 1
Conventional Payback Period = 1 + ($3,600,000 ÷ $5,100,000)
= 1 + 0.71
= 1.71 year
2. The computation is shown below:-
<u>Year 0 Year 1 Year 2 Year 3
</u>
Expected Cash flow ($6,000,000) $2,400,000 $5,100,000 $2,100,000
Discount factor at
9% 1 0.91743 0.84168 0.77218
Discounted Cash
Flow ($6,000,000) $2,201,835 $4,292,568 $1,621,585
Cumulative Discounted
Cash Flow ($6,000,000) ($3,798,165) $494,403 $2,115,988
Discounted Payback
Period 1 0.88
Conventional Payback Period = 1 + ($3,798,165 ÷ $4,292,568)
= 1 + 0.88
= 1.88 year
3. B. Discounted Payback Period.
The payback period is the period in which it tells in how many years the initial investment amount could be recovered and the discounted payback period is the period in which the cash outflows and the cash inflows are discounted
4. B. $2,115,988 which shows the more than the higher the cash inflow above the project investment value.
