Itself 500 150 150 150 150 150 150 150 500 0 1 2 3 4

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Unformatted text preview: 150 150 150 150 150 150 150 (500) 0 1 2 3 4 5 6 7 150 8 Payback Period Payback How long will it take for the project How to generate enough cash to pay for itself? itself? (500) 150 150 150 150 150 150 150 (500) 0 1 2 3 4 5 6 7 Payback period = 3.33 years. 3.33 150 8 Payback Period Is a 3.33 year payback period good? Is 3.33 Is it acceptable? Firms that use this method will compare Firms the payback calculation to some standard set by the firm. standard If our senior management had set a cutoff of 5 years for projects like ours, off years what would be our decision? what Accept the project. Drawbacks of Payback Period Drawbacks Firm cutoffs are subjective. Firm subjective Does not consider time value of Does money. money. Does not consider any required Does rate of return. rate Does not consider all of the Does project’s cash flows. cash Drawbacks of Payback Period Drawbacks Does not consider all of the Does project’s cash flows. project’s (500) 150 150 150 150 150 (300) 0 (500) 0 7 8 0 1 2 3 4 5 6 Consider this cash flow stream! Drawbacks of Payback Period Drawbacks Does not consider...
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