Question

In: Finance

Net Present Value and Other Investment Criteria Payback Period - Concerning payback: a. Describe how the...

Net Present Value and Other Investment Criteria

Payback Period - Concerning payback:

a. Describe how the payback period is calculated, and describe the information this measure provides about a sequence of cash flows. What is the payback criterion decision rule?

b. What are the problems associated with using the payback period to evaluate cash flows?

c. What are the advantages of using the payback period to evaluate cash flows? Are there any circumstances under which using payback might be appropriate? Explain.

250 Words.

Solutions

Expert Solution

a) Payback period shows in how much time initial cash outflow will be recovered. Here it is assumed that the cash flows are occuring through out the year and not on some point of time. In other words Payback period is break even point of series of cash flows. Payback period is caluclated as follows

Initial Investment / Annual cash Inflow

Given some predetermined cutoff for pay back period, Accept the project if payback period is within the predetermined cutoff or reject the project if payback period is outside predetermined cutoff

b) Following are the problem associated with payback period

1) It does not consider time value of money

2) It does not consider number of/size of cash flow after the predetermined cutoff thus making it biased towards short term projects

c) Advantages of using payback period

1) It is simple to calculate and straight forward

2) Accounting information is readily available

Since payback period focuses on liquidity, it may be useful to analysis short term project where cash management is important.


Related Solutions

3. Payback Period - Concerning payback: a. Describe how the payback period is calculated, and describe...
3. Payback Period - Concerning payback: a. Describe how the payback period is calculated, and describe the information this measure provides about a sequence of cash flows. What is the payback criterion decision rule? b. What are the problems associated with using the payback period to evaluate cash flows? c. What are the advantages of using the payback period to evaluate cash flows? Are there any circumstances under which using payback might be appropriate? Explain.
Determine the Payback Period, the Discounted Payback Period, and the Net Present Value for the following...
Determine the Payback Period, the Discounted Payback Period, and the Net Present Value for the following after-tax cash flow projections. Also tell me whether the IRR is greater or less then the RRR. A. Year ATCF 0 $(60,000) 1 21,000 2 27,000 3 24,000 4 16,000 Assume a 16% required rate of return
Determine the Payback Period, the Discounted Payback Period, and the Net Present Value for the following...
Determine the Payback Period, the Discounted Payback Period, and the Net Present Value for the following after-tax cash flow projections. Also tell me whether the IRR is greater or less then the RRR B. Year ATCF 0 (100,000) 1 (320,000) 2 130,000 3 185,000 4 200,000 5 195,000 6 150,000 Assume a 20% required rate of return
Calculate the net present value, internal rate or return and payback period for an investment project...
Calculate the net present value, internal rate or return and payback period for an investment project with the following cash flows using a 5 percent cost of capital:                 Year                       0                              1                              2                              3                 Net Cash Flow   -$150,000             $62,000 $62,000 $62,000 Do you recommend the investment?                
Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value Presented is information...
Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value Presented is information pertaining to the cash flows of three mutually exclusive investment proposals: Proposal X Proposal Y Proposal Z Initial investment $52,000 $52,000 $52,000 Cash flow from operations Year 1 50,000 26,000 52,000 Year 2 2,000 26,000 Year 3 27,000 27,000 Disinvestment 0 0 0 Life (years) 3 years 3 years 1 year (a) Select the best investment proposal using the payback period, the accounting rate...
Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value Presented is information...
Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value Presented is information pertaining to the cash flows of three mutually exclusive investment proposals: ............................................................................................Proposal A Propsal B Propsal C Initial Investment............................................................... 60000 60000 60000 Cash flow from oeprations:    Year 1 50000 30000 60000 Year 2 6000 30000 Year 3 29000 25000 Disinvestment 0 0 0 Life (years) 3 3 1 Required a.  Rank these investment proposals using the payback period, the accounting rate of return on...
Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value Presented is information...
Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value Presented is information pertaining to the cash flows of three mutually exclusive investment proposals: Proposal A Proposal B Proposal C Initial investment $ 60,000 $ 60,000 $ 60,000 Cash flow from operations Year 1 50,000 30,000 60,000 Year 2 6,000 30,000 Year 3 29,000 25,000 Disinvestment 0 0 0 Life (years) 3 years 3 years 1 year (a) Select the best investment proposal using the payback period,...
Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value Presented is information...
Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value Presented is information pertaining to the cash flows of three mutually exclusive investment proposals: Proposal A Proposal B Proposal C Initial investment $ 100,000 $ 100,000 $ 100,000 Cash flow from operations Year 1 60,000 25,000 110,000 Year 2 40,000 40,000 Year 3 35,000 70,000 Disinvestment 0 0 0 Life (years) 3 years 3 years 1 year Rank these investment proposals using the payback period, the accounting...
Calculate? (a) net present? value, (b) payback? period, (c) discounted payback? period, and? (d) internal rate...
Calculate? (a) net present? value, (b) payback? period, (c) discounted payback? period, and? (d) internal rate of return. Cost of the equipment $166,000 Reduced labor costs $45,000 Estimated life of the equipment 10 years Terminal disposal value ?$0 ?After-tax cost of capital 12 ?% Tax rate 20 ?% Assume depreciation is calculated on a? straight-line basis for tax purposes. Assume all cash flows occur at? year-end except for initial investment amounts. Calculate? (a) net present? value, (b) payback? period, (c)...
Chapter 8 discussed the following investment criteria: net present value, payback, profitability index, average accounting return,...
Chapter 8 discussed the following investment criteria: net present value, payback, profitability index, average accounting return, and the internal rate of return. Which one of these is the most valuable from a financial point of view and why?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT