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The discounted payback period offers several advantages, including a more accurate assessment of an investment's risk by accounting for the time value of money. This method helps investors understand how long it will take to recoup their initial investment in present value terms, providing a clearer picture of cash flow timing. Additionally, it aids in comparing different investment opportunities by allowing for a consistent evaluation of cash flows over time, which can lead to more informed decision-making.
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Adavntages of using payback period?
advantages of payback period?
Blanchford Enterprises is considering a project that has the following cash flow and WACC data What is the project's discounted payback?
To calculate the project's discounted payback period, you need to first determine the present value of each cash flow using the given Weighted Average Cost of Capital (WACC) as the discount rate. Then, you can accumulate these discounted cash flows until they equal the initial investment. The discounted payback period is the time it takes for this accumulation to occur. If you provide the specific cash flow amounts and the WACC, I can help you calculate the exact discounted payback period.
What are the disadvantages of the discounted 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
What are the advantages of using payback period?
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
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