Week 9 ACCY 111 RJD Lecture 6

Payback period pp decision rules for a project to be

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Payback Period (PP) Decision Rules: For a project to be acceptable it would need to have a maximum payback period If there are competing projects, the project with the shorter payback period would be chosen
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Payback Period (PP) Advantages of PP: Quick and easy to calculate Easily understood by managers Emphasises the short term liquidity (i.e. projects that can recoup their costs quickly are economically more attractive)
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Payback Period (PP) Disadvantages of PP: Disregards the relative timing of cash flows Excludes post payback period cash flows Unrelated to promoting increases in wealth of the organisation and its owners – tends to recommend projects that pay for themselves quickly.
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Investment decisions - summary Accounting Rate of Return (ARR) is the average accounting profit from the project expressed as a percentage of the average investment. Payback Period (PP) is the length of time that it takes for the cash outflow for the initial investment to be repaid out of resulting cash inflows.
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Next Time The time value of money – NPV and IRR Please read: Chapter 11 pp. 507 - 530
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