Do you want BuboFlash to help you learning these things? Or do you want to add or correct something? Click here to log in or create user.



Cons of Payback
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
  • It ignores cash flows beyond the payback period. Payback period is a type of "break-even" analysis: it indicates how quickly you can make enough money to recover the initial investment, not how much money you can make during the life of the project.
  • It does not consider the time value of money. Therefore, the cost of capital is not reflected in the cash flows or calculations.
If you want to change selection, open document below and click on "Move attachment"

Subject 3. Investment Decision Criteria
establish a benchmark payback period. Reject if payback is greater than benchmark. Payback A = 1 + (1000 - 750)/350 = 1.7 years Payback B = 3 + (1000 - 100 - 250 - 450)/750 = 3.27 years Drawbacks: <span>It ignores cash flows beyond the payback period. Payback period is a type of "break-even" analysis: it indicates how quickly you can make enough money to recover the initial investment, not how much money you can make during the life of the project. It does not consider the time value of money. Therefore, the cost of capital is not reflected in the cash flows or calculations. Discounted Payback Period This


Summary

statusnot read reprioritisations
last reprioritisation on suggested re-reading day
started reading on finished reading on

Details


Discussion

Do you want to join discussion? Click here to log in or create user.