The internal rate of return and the payback period are two factors that are considered during the course of budget planning. Sometimes these two factors will coincide, other times they will contradict. Both of these methods do not show the true value of a proposed project, which is why it is valuable to use both equations when budgeting.
advantages of payback period?
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.
What is the payback period of the following project? Initial Investment: $50,000 Projected life: 8 years Net cash flows each year: $10,000
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.
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Formula for the Payback Period. Payback period = Initial investment / Annual Cash inflows
advantages of 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.
discounted 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
A capital budget includes a payback period, the net present value, and the internal rate of return. It may also include a modified internal rate of return.
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
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.
we only know the disadvantages: The cash flows beyond the payback period are ignored..