Chapter 8 Course summary from Connect

Chapter 8 Course summary from Connect - Chapter 8 Course...

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Chapter 8 Course from Connect An investment should be accepted if the net present value is positive and rejected if it is negative. Payback is the Length of time it takes to recover our initial investment, or “get our bait back.” Because this idea is widely understood and used, we will examine it in some detail. Analyzing the Rule: When compared to the NPV rule, the payback period rule has some rather severe shortcomings. First the payback period is calculated by simply adding up the future cash flows. There is no discounting involved, so the time value of money is completely ignored. The payback rule also fails to consider risk differences. The payback would be calculated the same way for both very risky and very safe projects. Redeeming Qualities of the Rule: Despite its shortcomings, the payback period rule is often used by large and sophisticated companies when they are making relatively minor decisions. There are several reasons for this. The primary reason is that many decisions simply do not
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