Blue Hamster Manufacturing Inc. 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 Omega’s expected future cash flows. To answer this question, Blue Hamster’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 and compute the project’s conventional payback period. Round the payback period to the nearest two decimal places. Be sure to complete the entire table—even if the values exceed the point at which the cost of the project is recovered. Year 0 Year 1 Year 2 Year 3 Expected cash flow$-6,000,000$2,400,000$5,100,000$2,100,000 Cumulative cash flow Conventional payback period: years The conventional payback period ignores the time value of money, and this concerns Blue Hamster’s CFO. He has now asked you to compute Omega’s discounted payback period, assuming the company has a 7% cost of capital. Complete the following table and perform any necessary calculations. Round the discounted cash flow values to the nearest whole dollar, and the discounted payback period to the nearest two decimal places. Again, be sure to complete the entire table—even if the values exceed the point at which the cost of the project is recovered. Year 0 Year 1 Year 2 Year 3 Cash flow$-6,000,000$2,400,000$5,100,000$2,100,000 Discounted cash flow Cumulative discounted cash flow Discounted payback period: years Which version of a project’s payback period should the CFO use when evaluating Project Omega, given its theoretical superiority? The regular payback period The discounted payback period
