Question

In: Finance

Discuss briefly and evaluate if the following statement isaccurate or not.“Payback Period accounts for...

Discuss briefly and evaluate if the following statement is accurate or not.

“Payback Period accounts for Time Value of Money but does not consider cash-flows that occur after the initial outlay is paid. It is therefore effectively useless as a project evaluation tool.”

Solutions

Expert Solution

Payback period refers to the period within which an entity can recover its investment amount which has been invested by it at initial point of time. In other words, payback period states the period in terms of years within which an entity could recover its costs incurred at Year0. It does not take into account time value of money as under such approach the cash flows are not discounted.

In discounted payback period, the cash flows occuring in future years are discounted to determine the number of years within which an entity could recover its investment. It takes into account effect of time value of money.

Thus the given statement is not accurate as payback period does not account for time value of money or does not discount cash flows. However, it consider the cash flows occuring in near future term. Also it is not a useless project evaluation tool.

Hence as per the above analysis, the given statement is not accurate.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

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
The Basics of Capital Budgeting: Payback Period Payback Period Payback period was the earliest ________ selection...
The Basics of Capital Budgeting: Payback Period Payback Period Payback period was the earliest ________ selection criterion. -Select- capital structure financial statement capital budgeting The _________ -Select- NPV MIRR IRR payback is a "break-even" calculation in the sense that if a project's cash flows come in at the expected rate, the project will break even. The equation is: The -Select- shorter longer a project's payback, the better the project is. However, payback has 3 main disadvantages: (1) All dollars received...
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.
Distinguish between the payback period and the discounted payback period?
Distinguish between the payback period and the discounted payback period?
Describe briefly the limitations of the simple payback period as an evaluation criterion and why this...
Describe briefly the limitations of the simple payback period as an evaluation criterion and why this can disadvantage renewable energy technologies compared to conventional fossil fuel power supply.
Payback Period
A project has an initial cost of $500,000 whereas it has an expected annual cash flow of $75,000 each year for the next 10 years. The firm has the criteria of accepting the project if its payback period is 6 years or less. Based on the payback period, state whether the project would be accepted or not?
What is the difference between discount payback period and payback period
What is the difference between discount payback period and payback period
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.
the longer the time period the less reliable the payback method. Is that a true statement?...
the longer the time period the less reliable the payback method. Is that a true statement? If so, why? Think about the time value of money. If we have a ten year time frame versus a three year time frame will the present value of an inflow in the latter years will be more or less accurate? In addition, think about how this relates to valuing a short versus long term debt security. With that said, honestly, are the more...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT