310chapter16m8

management expects the espresso bar will need a major

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Unformatted text preview: piece of information . . . . . 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 chosen...
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