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.
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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
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