Question
In: Finance
"The payback period analysis ignores differences in the timing of cash flows". Give your own example...
"The payback period analysis ignores differences in the timing of cash flows". Give your own example to explain the statement.
Solutions
Expert Solution
Answer:
The payback period has some huge disadvantages. The first is that it neglects to consider the time value of money (TVM) and modify the money inflows in like manner. The TVM is the possibility that the estimation of money today will be worth more than later on in light of the current day's gaining potential.
For example, an inflow of $100,000 from a project venture that happens in the tenth year (say) following the year in which the initial investment is made is seen as having a similar value as a $100,000 money that happened in the year the project venture was made regardless of the real situation where due to the influence of time value of money (purchasing power) $100,000 is likely to be lower following the ten years.
Moreover, the payback period neglects the inflows of money that happen after the payback period, accordingly neglecting to look at the general benefit of one task when compared with another.
jeff jeffy answered 2 years agoRelated Solutions
Which of the following ignores late cash flows? I. Profitability index II. Discounted payback period III....
Which of the following ignores late cash flows?
I. Profitability index
II. Discounted payback period
III. Net present value
IV. Payback period
I and III only
II and IV only
I, II, and III only
I, III, and IV only
(Payback period) What is the payback period for the set of cash flows in the popup...
(Payback period) What is the payback period for the set of cash
flows in the popup window, LOADING... ? The payback period for
the set of cash flows is nothing years. 0 -11,200 1 3,800 2 4,800 3
3,700 4 4,600 5 3,200
(Payback period, NPV, PI, and IRR calculations) You are
considering a project with an initial cash outlay of $75,000 and
expected free cash flows of $22,000 at the end of each year for 6
years. The...
Match up the payback period with the cash flows. - A. ...
Match up the payback period with the cash flows.
-
A. B.
C. D.
E.
CF0: -905 CF1: 830 CF2: 130 CF3: 770 CF4: 270
-
A. B.
C. D.
E.
CF0: -1075 CF1: 850 CF2: 320 CF3: 730 CF4: 100
-
A. B.
C. ...
A. What is the payback period for the following set of cash flows? Year Cash...
A.
What is the payback period for the following set of cash
flows?
Year
Cash Flow
0
−$ 5,300
1
2,300
2
2,300
3
1,400
4
1,100
B.
A project with an initial cost of $22,350 is expected to
generate cash flows of $5,200, $7,300, $8,400, $7,300, and $6,000
over each of the next five years, respectively. What is the
project's payback period?
C.
A new project has an initial cost of $133,000. The...
What is the payback period for the following set of cash flows? Year Cash Flow...
What is the payback period for the following set of cash
flows?
Year
Cash Flow
0
−$ 4,200
1
2,500
2
2,600
3
2,600
4
1,900
Given the following cash flows for a capital project, calculate its payback period and discounted payback...
Given the following cash flows for a capital project, calculate
its payback period and discounted payback period. The required rate
of return is 8 percent. Year 0 1 2 3 4 5 Cash Flows $-37500 $11250
$11250 $15000 $6000 $6000 The discounted payback period is 0.16
year longer than the payback period. 0.80 year longer than the
payback period. 1.27 years longer than the payback period. 1.85
years longer than the payback period.
Given the following cash flows for a capital project, calculate its payback period and discounted payback...
Given the following cash flows for a capital project, calculate
its payback period and discounted payback period. The required rate
of return is 8 percent.
Year
0
1
2
3
4
5
Cash Flows
$-56900
$13650
$18050
$25200
$10000
$5000
The discounted payback period is
Determine the payback period using the accumulated and average cash flows approaches.
Baird Company has an opportunity to purchase a forklift to use in its heavy equipment rental business. The forklift would be leased on an annual basis during its first two years of operation. Thereafter, it would be leased to the general public on demand. Baird would sell it at the end of the fifth year of its useful life. The expected cash inflows and outflows follow:
Year
Nature of Item
Cash Inflow
Cash Outflow
Year 1
Purchase price...
What is the Payback period of a project with cash flows of -350,000 in year 0,...
What is the Payback period of a project with cash flows of
-350,000 in year 0, then 100,000 each in years 1, 2 & 3, then
250,000 in year 4? Assume the cost of capital is 10%.
2.0 years
2.75 years
3.2 years
can't tell from information given
Consider the project in the previous question, what is its
IRR?
5.56%
9.83%
14.1%
17.54%
(1). What is the payback period of an investment with the following cash flows? Year ...
(1). What is the payback period of an
investment with the following cash flows?
Year Cash Flow
0
-60,000
1
30,000
2
20,000
3
15,000
4
10,000
5
5,000
(2). A project has the following cash flows:
Year Cash
Flow
0
-$4,000
1
2,000
2
2,000
3
2,000
4
2,000
Its cost of capital is 10 percent. What is the project’s
discounted payback period?
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