Easytocalculateandunderstand weaknesses

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Unformatted text preview: r The Project Computing Payback For The Project Assume we will accept the project if it pays back within two years. Do we accept or reject the projects? Strengths and weaknesses of Strengths and weaknesses of payback Strengths Provides an indication of a project’s risk and liquidity. Easy to calculate and understand. Weaknesses Ignores the time value of money. Requires an arbitrary cutoff point Ignores CFs occurring after the payback period. Discounted Payback Period Discounted Payback Period Compute the present value of each cash flow and then determine how long it takes to payback on a discounted basis Compare to a specified required period Decision Rule ­ Accept the project if it pays back on a discounted basis within the specified time Discounted payback period Discounted payback period Uses discounted cash flows rather than raw CFs. 0 CFt PV of CFt Cumulative -100 -100 -100 Disc PaybackL = 2 + 1 2 10 9.09 -90.91 10% 60 49.59 -41.32 41.32 / 60.11 2.7 3 80 60.11 18.79 = 2.7 years Computing Discounted Payback for Computing Discounted Payback for the Project Assume we w...
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