Using the given information, we can calculate the discounted payback period as follows: In this case, we see that the project’s payback period is 4 years. Since the project’s life is calculated at 5 years, we can infer that the project returns a positive NPV.
The shorter the discounted payback period, the quicker the project generates cash inflows and breaks even. While comparing two mutually exclusive projects, the one with the shorter discounted payback period should be accepted.
from the initial cost figure in order to obtain the discounted payback period. Once we’ve calculated the discounted cash flows for each period of the project, we can subtract them from the initial cost figure until we arrive at zero. Assume a business that is considering a given project.
A project may have a longer discounted payback period but also a higher NPV than another if it creates much more cash inflows after its discounted payback period. Such an analysis is biased against long-term projects.
The discounted payback period has which of these weaknesses? Arbitrary cutoff date, Loss of simplicity as compared to the payback method and exclusion of some cash flows.
Note that the payback method has two significant weaknesses. First, it does not consider the time value of money. Second, it only considers the cash inflows until the investment cash outflows are recovered; cash inflows after the payback period are not part of the analysis.
Disadvantages. Calculation of the payback period using discounted payback period method fails to determine whether the investment made will increase the firm's value or not. It does not consider the project that can last longer than the payback period.
Which of the following statements is correct? A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback.
The payback method is simple and easy to understand. It is a handy method when screening many proposals and particularly when predicted cash flows in later years are highly uncertain. The main weaknesses of the payback method are its neglect of the time value of money and of the cash flows after the payback period.
The weaknesses of using the payback period are (1) no explicit consideration of shareholders' wealth, (2) failure to take fully into account the time value of money, and (3) failure to consider returns beyond the payback period and hence overall profitability of projects.
Answer: (A) The time value of money is ignored. It ignores cash flows beyond the payback period.
Answer: D. It ignores the expected profitability of a project. A disadvantage of the cash payback technique is that it ignores the expected... See full answer below.
A major criticism of the payback period method is that it ignores the "time value of money," the principle that describes how the value of a dollar changes over time. A project that costs $100,000 upfront and generates $10,000 in positive cash flow per year has a payback period of 10 years.
Which of the following is not true of the payback period method? It fails to take into account a project's net cash flows after the payback period.
Example of the Discounted Payback Period Assume that Company A has a project requiring an initial cash outlay of $3,000. The project is expected to return $1,000 each period for the next five periods, and the appropriate discount rate is 4%.
Which of the following statements is NOT true regarding Payback Period? Payback Period is impacted by cash flows that occur after the initial cost is recovered. This is the correct answer! This statement is NOT true.
Both the payback period and the discounted payback period can be used to evaluate the profitability and feasibility of a specific project.
What is the Discounted Payback Period? The discounted payback period is a modified version of the payback period that accounts for the time value of money. Time Value of Money The time value of money is a basic financial concept that holds that money in the present is worth more than the same sum of money to be received in the future.
One of the disadvantages of discounted payback period analysis is that it ignores the cash flows after the payback period. Thus, it cannot tell a corporate manager or investor how the investment will perform afterward and how much value it will add in total. It may lead to decisions that contradict the NPV analysis.