Question

In: Finance

A firm may choose a project with a rapid payback period rather than one with a...

A firm may choose a project with a rapid payback period rather than one with a larger net present value. Discuss the validity of this statement.

paragraph answer:

Solutions

Expert Solution

This statement could be valid in certain cases.

Usually, firms choose projects with the higher NPV because a higher NPV increases the value of the firm. A higher NPV generates more value for investors because NPV directly measures the value created in dollar terms.

However, there may be certain cases where a firm prefers a lower payback period than a higher NPV. For example :

  • The project is in a foreign country with risk of expropriation.
  • The predictability of cash flows are highly uncertain in the later years of the project.
  • Recovery of capital is more important than value creation

In such cases, the firm may choose a project with a faster payback than a larger NPV

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

A firm may choose a project with a rapid payback period rather than one with a...
A firm may choose a project with a rapid payback period rather than one with a larger net present value. Discuss the validity of this statement.
Question 8A firm may choose a project with a rapid payback period rather than one with...
Question 8A firm may choose a project with a rapid payback period rather than one with a larger net present value. Discuss the validity of this statement. (2points) Question 9The internal rate of return represents the rate of interest that recovers the initial investment outlay.Discuss the validity of this statement. (3points) Question 10In the face of the global financial crisis, Kevin Rudd introduced government guarantees on deposits. Discuss covering at least the following two parts: 1.An introduction/summary of the Government...
Question 8A firm may choose a project with a rapid payback period rather than one with...
Question 8A firm may choose a project with a rapid payback period rather than one with a larger net present value. Discussthe validity of this statement. (2points) Question 9The internal rate of return represents the rate of interest that recovers the initial investment outlay.Discussthe validity of this statement. (3points) Question 10In the face of the global financial crisis,Kevin Rudd introduced government guarantees on deposits. Discuss covering at least the followingtwoparts: 1.An introduction/summaryof the Government Guarantee. 2.Thegeneralimpact of this policy to...
If management requires a 3 year payback period, which project would you choose?
(Chapter 11 payback period) year Proj A Proj B Proj C 0         (1,000)         (10,000)         (5,000) 1               600              5,000           1,000 2               300              3,000           1,000 3               200              3,000           2,000 4               100              3,000           2,000 5               500              3,000           2,000 If management requires a 3 year payback period, which project would you choose? If the discount rate is 12% and management still requires a 3 year pay...
1: The discounted payback period will A: always be longer than the payback period. B: uses...
1: The discounted payback period will A: always be longer than the payback period. B: uses discounted cash flows C: both "A" and "B" are correct D: is the same as the payback period 2: The cost of capital is: A: another term for the market risk premium. B: another term for the risk-free rate of return. c C: the return on the overall market. D: the minimum required return on a new investment 3: A special dividend A: is...
The discounted payback rule: A. does not always choose the better project if the firm has...
The discounted payback rule: A. does not always choose the better project if the firm has to decide between two mutually exclusive projects B. always leads to selecting projects that decrease firm value C. does not rely on a discount factor D. ignores the time value of money
Calculate the Payback Period and Discounted Payback Period for the following project: 1. An initial investment...
Calculate the Payback Period and Discounted Payback Period for the following project: 1. An initial investment of $20,000 with expected after-tax operating cash flows of $125,000 per year for each of the next 3 years. However, in preparation for its termination at the end of year 3, an additional investment of $350,000 must be made at the end of Year 2. Please show all work in excel.
In financial terms, what is the biggest downfall to using payback rather than discounted payback when...
In financial terms, what is the biggest downfall to using payback rather than discounted payback when analyzing a project? The first choice always seems to be best. It does not account for time value of money. The WACC isn't accurate. It is more difficult to calculate than discounted payback.
When should a firm choose the global strategy rather than a multidomestic strategy? How might a...
When should a firm choose the global strategy rather than a multidomestic strategy? How might a given country’s regulatory environment impact a firm’s international strategy? How do the international strategies affect the trade-offs managers must make between local responsiveness and global efficiency
Payback period is one of the techniques discussed for assessing which projects a firm should invest...
Payback period is one of the techniques discussed for assessing which projects a firm should invest in. In finance we generally frown upon it, believing there are a number of better approaches to choose from. Despite this fact, businesses (especially historically) often use payback period. What are some of the drawbacks to this technique? Illustrate with an example of how these drawbacks could lead one to a poor decision if payback period is used.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT