Why is an investment more attractive to management if it has a shorter payback period? Should this be the only consideration? Explain.
Pay back period - The pay back period is the time frame in. Which u tend to earn from the net cash flow of investment, an amount equal to the investment made. For eg : if you invested $1000 so the time in which $1000 will be earned in gross from the cash flow of such investment is termed as pay back period.
Why is short pay back period more attractive?
Shorter pay back period means the amount invested is recovered in short period of time, which means the risk associated with the capital sum invested will be reduced to zero. From then the investment will earn the profit margin as our investment amount has been recovered. Thus, shorter pay back period is more attractive for the managers.
Is this the only consideration?
No, short time period is not the only consideration for determining a suitable investment plan. The major drawback of pay back method is that it ignores the time value of money.
Hence there are many other considerations as follows :-
The amount of investment
Pattern of cash flow expected
Time value of money
Hence it is not the only consideration, there fore
The net present value of the net cash flow
The internal rate of return
Are the two appropriate approaches to determine the best investment opportunities.
Why is an investment more attractive to management if it has a shorter payback period? Should...
4. Why is a long payback period of seven years for an investment in a recruiting candidate assessment center more risky for an employer than a shorter payback period of two years for the same investment? (30 points)
Along with the questions, is
the first one shorter or longer?
A project's payback period (PB) indicates the number of years required for a project to recover its initial investment using its operating cash flows. As the theoretical soundness of the conventional (undiscounted) PB technique was criticized, the model was modified to incorporate the time value of money-adjusted operating cash flows to create the discounted payback method. While both payback models continue to reflect faulty ranking criteria, they do provide...
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Payback period The Ball Shoe Company is considering an investment project that requires an initial investment of $534,000 and returns after-tax cash inflows of $90,514 per year for 10 years. The firm has a maximum acceptable payback period of 8 years. a. Determine the payback period for this project. b. Should the company accept the project?
Payback period The Ball Shoe Company is considering an investment project that requires an initial investment of $542,000 and returns after-tax cash inflows of $75,000 per year for 10 years. The firm has a maximum acceptable payback period of 8 years. a. Determine the payback period for this project. b. Should the company accept the project? a. The payback period for this project is years. (Round to two decimal places.) Enter your answer in the answer box and then click...
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Ihis Test: 50 pts possible Payback comparisons Nova Products has a 5-year maximum acceptable payback period The firm is between two afematves. The first machine requires an intia investment of $14,000 and generates annual The second machine requires an initial investment of $21,000 and provides an annual cash inflow after taxes of $4,000 for 20 years of a new machine and must choose after-tax cash inflows of $3,000 for each of the next 7 years ng the a. Determine the...
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