To calculate a more exact payback period: payback period = amount to be invested / estimated annual net cash flow. The payback method also ignores the cash flows beyond the payback period; thus, it ignores the long-term profitability of a project.
The payback method is a method of evaluating a project by measuring the time it will take to recover the initial investment. The payback period is the number of months or years it takes to return the initial investment.
The payback period ignores the time value of money. 18. Payback is best used to evaluate which type of projects? A. Low-cost, short-term B. High-cost, short-term C. Low-cost, long-term D. High-cost, long-term E. Any size of long-term project A. Low-cost, short-term 19. Which one of the following is the primary advantage of payback analysis?
A longer payback period is preferred over a shorter payback period. B. The payback rule states that you should accept a project if the payback period is less than one year. C. The payback period ignores the time value of money.
The correct answer is: Projects that meet the target payback period should be profitable. Payback provides no measure of profitability even if the project payback is less than the targetpayback period.
The payback period ignores the time value of money.
Payback ignores the time value of money. Payback ignores cash flows beyond the payback period, thereby ignoring the "profitability" of a project. To calculate a more exact payback period: Payback Period = Amount to be Invested/Estimated Annual Net Cash Flow.
The most significant advantage of the payback method is its simplicity. It's an easy way to compare several projects and then to take the project that has the shortest payback time. However, the payback has several practical and theoretical drawbacks.
The average accounting return ignores cash flows is most similar to computing the return on assets (ROA).
The time value of money is the central concept in discounted cash flow (DCF) analysis, which is one of the most popular and influential methods for valuing investment opportunities. It is also an integral part of financial planning and risk management activities.
Therefore, the method ignores cash generation beyond the period when cash inflow exceeds investment is the Payback method.
The two major weaknesses of the payback method are: • the time value of money is not considered; • the cash flows after the investment is recovered are not considered. the time value of money is not considered; the cash flows after the investment is recovered are not considered.
Net present value (NPV) looks to assess the profitability of a given investment on the basis that a dollar in the future is not worth the same as a dollar today. Money loses value over time due to inflation.
Advantages of Payback Period The method needs very few inputs and is relatively easier to calculate than other capital budgeting methods. All that you need to calculate the payback period is the project's initial cost and annual cash flows.
Question: Which of the following is not a disadvantage of the payback period method of capital budgeting evaluation? answer choices It does not estimate the value added to the firm.
The payback period is especially useful for a business that tends to make relatively small investments, and so does not need to engage in more complex calculations that take other factors into account, such as discount rates and the impact on throughput.