Homework Answers
Option C. Discounted payback and Payback
Payback is the length of time it takes for the project to move into overall positive cash flows. For instance, a project that costs $50000 and has cash flows of $18800 will move into overall positive cash flows in year 3. Where cash flows will reach $5800.
Discounted payback also incorporates time value of money where a cost of capital factor is used to discount net cash inflows every year. And hence for same cash flow as for above example, the payback might be longer.
The reason these two methods are used in Short term projects is because cash flows are simple and predictable in short term projects and usually after the initial year, there are not much of cash outflows.
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