Fuzzy Button Clothing 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 Sigma's expected future cash flows

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Fuzzy Button Clothing 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 Sigma's expected future cash flows. To answer this question, Fuzzy Button's CFO has asked you to compute the projects payback period using the expected net cash flows and assuming that the cash flows are received evenly throughout each year.

Complete the following table and compute the projects conventional payback period. For full credit, Complete the entire table.

 

	Year 0	Year 1	Year 2	Year 3
Expected Cash Flow	-5,500,000	$2,200,000	$4,675,000	$1,925,000
Cumulative Cash Flow
Conventional Payback Period	_____ years

 

The conventional payback period ignores the time value of money, and this concerns Fuzzy Buttons CFO. He has now asked you to compute Sigma'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 the nearest two decimal places. For full credit, complete the entire table.

 

	Year 0	Year 1	Year 2	Year 3
Cash Flow	-5,500,000	$2,200,000	$4,675,000	$1,925,000
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 Sigma, given its theoretical superiority?

A. the regular payback period

B. the discounted payback period

How much should value does the discounted payback period method fail to recognize due to this theoretical deficiency?

$1, 486, 453

$3, 504, 802

$5, 421, 307

$1, 939, 656