Its primary advantage is that it is easy to understand and to calculate

Its primary advantage is that it is easy to

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accepted decision rule. Its primary advantage is that it is easy to understand and to calculate. Marshall also read up on a subsequent model that was designed to assess some of the inherent weaknesses of the payback model known as the discounted payback period . This method incorporates the time-value of money concept into its calculation, giving the users a more conservative assessment model when determining how long it takes to recover an initial investment. In the traditional payback model, the operating cash flows are netted against the initial investment until the residual value approaches zero. For example, if a project required an initial outlay of $1,000 and was expected to provide cash inflows of $250 per year for 10 years, it would be rather simple to conclude that in 4 years, the initial investment would be recouped. In the same example, but with cash inflows of $300 per year, the payback period would be 3 and 1/3 years.
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Because the model ignores cash inflows after the payback period, the analyst could have a case where the cash inflows after the payback period for one project are stronger than the other, but it could be rejected because it has a longer payback period. For example, assuming the cases presented earlier, an analyst could have the one project that cost $1,000 and generates $250 cash inflows in Years 1 through 4, but then they jump to $500 per year. In the second case, the project could cost $1,000 and cash inflows in the first 4 years of $300 per year, but then to drop to $100 per year after the payback period is met. Using payback, the second project would be accepted because it has a shorter payback period (3 1/3 years vs. 4 years) even though the first would have the greater overall total cash inflows. Also, the fact that there is no universal or generally accepted decision rule suggests that a project that might be accepted by one company or financial manager and could be rejected by another company or finance manager, even if the cash flow patterns are the same. Marshall concluded
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