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Tags

#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Question

Is the cost of capital reflected in Payback period?

Answer

No

Tags

#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Question

Is the cost of capital reflected in Payback period?

Answer

?

Tags

#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10

Question

Is the cost of capital reflected in Payback period?

Answer

No

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#### Parent (intermediate) annotation

**Open it**

;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, <span>the cost of capital is not reflected in the cash flows or calculations. <span><body><html>

#### 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

;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, <span>the cost of capital is not reflected in the cash flows or calculations. <span><body><html>

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

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
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repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

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