Post 3 - company In practice companies...

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Bernard Ouma 16 Apr 11 6:50 PM MST Hi professor and class, when firms use the payback method, they have to consider the cutoff date because this will help them determine what kind of investment they choose. Firms that intend to make their money back within a specific period of time can use the payback method as a means of project evaluation because they can use the cutoff method to determine the length of the investment. I don't believe that the payback method would give an appropriate answer because it disregards all the cash flow after the cutoff date. this will eliminate all the cash inflow after the cash flow date thus, eliminating all the good long term investments. Hi Bernard, Good post, payback allows us to see how rapidly a project returns the initial investment back to the
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Unformatted text preview: company. In practice, companies establish "rules" around payback when evaluating a project. For example, a company might decide that all projects need to have a payback of less than five years. This is also referred to as you have said the “cutoff period”. Perhaps the greatest strength of the payback method is that it allows executives and managers to get a good feel for how much time will pass before they can recoup their investment. This allows for go, no-go, decisions to be made based on simple cutoff date rules. Acsis LTD (n.d.) retrieved from.
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