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Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
CONS OF PAYBACK
  • ​It [...] the payback period.
  • It does not [...]
Answer
ignores cash flows beyond

consider the time value of money.

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
CONS OF PAYBACK
  • ​It [...] the payback period.
  • It does not [...]
Answer
?

Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10
Question
CONS OF PAYBACK
  • ​It [...] the payback period.
  • It does not [...]
Answer
ignores cash flows beyond

consider the time value of money.
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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

Original toplevel document

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

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