What is the payback period of the following project?
Initial Investment: $50,000
Projected life: 8 years
Net cash flows each year: $10,000
Simple payback method do not care about the time-value of money principle while discounted payback period do take care of this principle in calculation.
The payback period is easy to use, compute and it does give a certain amount of information concerning risk. The disadvantages though include the fact that it ignores the profability of an investment and it does not take into account time value of money (TVM). Amber
advantages of payback period?
Payback period method is the strategy used to calculate the amount of time that a given investment will take to recover the initial cost. The amount of time will help in deciding whether the project is viable or not. The shorter the period the more viable the project.
Method of evaluating investment opportunities and product development projects on the basis of the time taken to recoup the investment. This period is compared to the required payback period to determine the acceptability of the investment proposal. In contrast to return on investment and net present value methods, the cash inflows occurring after the payback period are not included in this method. Formula: Payback period (in years) = Initial capital investment ÷ Annual cash-flow from the investment.
discounted payback period
Payback period = Net Investment Annual cash returns
Simple payback method do not care about the time-value of money principle while discounted payback period do take care of this principle in calculation.
A discounted payback method is a formula that is used to calculate how long to recoup investments based on the discounted cash flows of the investment. It is a variation of payback period or the time it takes to recover a project investment given the discounted cash flow it has.
we only know the disadvantages: The cash flows beyond the payback period are ignored..
The payback period is easy to use, compute and it does give a certain amount of information concerning risk. The disadvantages though include the fact that it ignores the profability of an investment and it does not take into account time value of money (TVM). Amber
payback period , it is to pay your period on time jajajaja
Formula for the Payback Period. Payback period = Initial investment / Annual Cash inflows
advantages of payback period?
It's not a direct measure of a project's contribution to stockholder's wealth. You may reject project's that should be accepted when using the NPV analysis (best method used for determining whether or not a project is accepted in Capital Budgeting). Discounted Payback Period AdvantagesConsiders the time value of money Considers the riskiness of the project's cash flows (through the cost of capital) Disadvantages No concrete decision criteria that indicate whether the investment increases the firm's value Requires an estimate of the cost of capital in order to calculate the payback Ignores cash flows beyond the discounted payback periodYounes Aitouazdi: University of Houston Downtown
Something is meant by the payback period. It is the length of time taken to recover the cost of an investment. This is what is meant by the payback period.
- the payback period is to dependent on cash inflows which are hard to predict. - The payback period only considers revenue, does not consider profits.