Unformatted text preview: Answer: Regular payback has two critical deficiencies: (1) it ignores the time value of money , and (2) it ignores the cash flows that occur after the payback period . Discounted payback does consider the time value of money, but it still fails to consider cash flows after the payback period; hence it has a basic flaw. In spite of its deficiency, many firms today still calculate the discounted payback and give some weight to it when making capital budgeting decisions. However, payback is not generally used as the primary decision tool. Rather, it is used as a rough measure of a project's liquidity and riskiness ....
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- Spring '08
- Net Present Value, PAYBACK PERIOD, discounted payback periods