Question

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 payback period. How much value in this example does the discounted payback period method fail to recognize due to this theoretical deficiency? $1,250,286 $2,916,953 $1,696,274 $4,529,607

Answer 1

The discounted payback period method fails to recognize the value of cash flows beyond the payback period. To calculate the value it fails to recognize, we need to determine the net present value of the cash flows beyond the payback period.

Step-by-step explanation:

The discounted payback period method fails to recognize the value of the cash flows beyond the point in time equal to the payback period. This means that it ignores the value of future cash flows that come after the payback period. To calculate the value that the discounted payback period method fails to recognize, we need to determine the net present value of the cash flows beyond the payback period.

Let's say the payback period is 5 years and the cash flows beyond that period are as follows: Year 6: $500,000, Year 7: $600,000, Year 8: $700,000, Year 9: $800,000, Year 10: $900,000.

Assuming a discount rate of 10%, we can calculate the net present value of the cash flows beyond the payback period:

1. Year 6: NPV = $500,000 / (1 + 0.10)6 = $301,194
2. Year 7: NPV = $600,000 / (1 + 0.10)7 = $396,531
3. Year 8: NPV = $700,000 / (1 + 0.10)8 = $449,246
4. Year 9: NPV = $800,000 / (1 + 0.10)9 = $488,494
5. Year 10: NPV = $900,000 / (1 + 0.10)10 = $523,347

The total net present value of the cash flows beyond the payback period is $301,194 + $396,531 + $449,246 + $488,494 + $523,347 = $2,158,812.

Answer 2

$1,763.323

Step-by-step explanation:

Please see attachment