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).
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advantages of payback period?
There are a few different advantages and disadvantages of payback. Payback can help ensure that there is further action in a case for example.
Disadvantages of Payback Method: It may lead to excessive investment in short term projects. The choice of any cut-off payback period by an organization is arbitrary.
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.
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.
advantages of payback period?
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Formula for the Payback Period. Payback period = Initial investment / Annual Cash inflows
discounted payback period
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.
Payback period = Net Investment Annual cash returns
There are a few different advantages and disadvantages of payback. Payback can help ensure that there is further action in a case for example.
Disadvantages of Payback Method: It may lead to excessive investment in short term projects. The choice of any cut-off payback period by an organization is arbitrary.
The basic criticisms of the payback period method are that it does not measure the profitability of an investment and it does not consider the time value of money.
payback period
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.