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Management expects the espresso bar will need a
major upgrade at the end of year six costing $90,000.
How does this important piece of information impact
the payback period of the espresso bar?
It doesn’t – since the payback is achieved by year 4,
all cash flows happening after that point are not
considered by this method. Chapter 16 Module 8: Payback Period
QUESTION: Given the glaring problems with
payback, how should it be used
in business? ANSWER: Use it as a screen or filter to
narrow the choices down to a
reasonable number. One this is
done, use the superior, but more
costly, NPV method to decide
which alternative should be
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- Spring '08