How is the method superior to the payback method
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.
For a small firm without access to capital markets, the payback method may be preferred because it provides a quick and straightforward way to assess the liquidity and risk of an investment by focusing on how quickly the initial investment can be recovered. This is particularly important for small firms that may face cash flow constraints and need to ensure that they can recoup their investment swiftly. Additionally, the payback method requires less data and complexity than the NPV method, making it more accessible for firms with limited financial analysis resources.
the payback method ... is a method to evaluate the project in capital budgeting ... or simply in a long term dicision making for the entity .and because it is a long term in nature ..... the risk is high ... by evaluatining methods ... we try to reduce the uncertinity ... one of the methods ...is payback method . the disadvantage of the payback method is ...it does not concern with the time value of money theory ....the second one is ...it ignore the incash flow and the outcash flow of the project , after the 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.
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How is the method superior to the payback method
Why is the NPV approach often regarded to be superior to the IRR method?
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.
payback period
For a small firm without access to capital markets, the payback method may be preferred because it provides a quick and straightforward way to assess the liquidity and risk of an investment by focusing on how quickly the initial investment can be recovered. This is particularly important for small firms that may face cash flow constraints and need to ensure that they can recoup their investment swiftly. Additionally, the payback method requires less data and complexity than the NPV method, making it more accessible for firms with limited financial analysis resources.
discuss the various methods adopted for a capital budgeting decision.
Net present value (NPV) is superior to accounting rate of return (ARR) and payback period (PB) because it takes into account the time value of money by discounting future cash flows back to the present. ARR does not consider the time value of money and only focuses on accounting profits. PB only considers the time it takes to recoup the initial investment without considering the profitability of the investment over its entire lifespan.
the payback method ... is a method to evaluate the project in capital budgeting ... or simply in a long term dicision making for the entity .and because it is a long term in nature ..... the risk is high ... by evaluatining methods ... we try to reduce the uncertinity ... one of the methods ...is payback method . the disadvantage of the payback method is ...it does not concern with the time value of money theory ....the second one is ...it ignore the incash flow and the outcash flow of the project , after the payback period .
Advantages:With the NPV method, the advantage is that it is a direct measure of the dollar contribution to the stockholders.With the IRR method, the advantage is that it shows the return on the original money invested.Disadvantages:With the NPV method, the disadvantage is that the project size is not measured.With the IRR method, the disadvantage is that, at times, it can give you conflicting answers when compared to NPV for mutually exclusive project.BY SHARANYA NV
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.
IRR, NPV, DCF are the main Investmetn Appraisal Techniques.
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