the discounted payback period is similar to the payback period except that it accounts for by d

Name: the discounted payback period is similar to the payback period except that it accounts for by discounting the expected cash flows at the projects cost of capital 10563
Uploaded: 2022-04-21T15:23:04-08:00
Duration: 51 s
Channel: Haricharan Gupta
Description: the discounted payback period is similar to the payback period except that it accounts for by discounting the expected cash flows at the projects cost of capital 10563

Step 1: Understand the concept of the payback period, which measures the time it takes for an in

The discounted payback period is similar to the payback...

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How much value in this example does the discounted payback period method fail to recognize due to this theoretical deficiency

Haricharan G.

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What information does the payback period provide? Payback period essentially provides the number of years it would take for a project to recover the initial investment from its operating cash flows. As the model was criticized, the model evolved incorporating time value of money to create the discounted payback method. The models still reflected faulty ranking criteria but they provided important information about liquidity and risk. Cash flows expected in the distant future are risky than cash flows received in the near-term—which suggests that the payback period can also serve as an indicator of project risk. Suppose ABC Telecom Inc.'s CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost; however, she does know that the project's regular payback period is 2.5 years. Year Cash Flow Year 1 $300,000 Year 2 475,000 Year 3 500,000 Year 4 450,000 If the project's weighted average cost of capital (WACC) is 9%, what is its NPV? $354,910 $390,401 $372,656 $337,165 Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply. The discounted payback period does not take the time value of money into account. The discounted payback period does not take the project's entire life into account. The discounted payback period is calculated using net income instead of cash flows.

Adi S.

What would be the effect of the use of a lower discount factor on the cash-flow analysis shown in Figure 20.8?

Crystal W.

Transcript

00:01 Hello students, we are given a question that what does the discounted payback period method fail to recognize due to theoretical deficiency? so first of all, we are supposed to know that it is a pure fact -based question.

00:12 We can directly state that it fails to recognize the cash flows after the payback period has occurred.

00:18 So we can write here that it fails to recognize the cash flow, okay? to recognize the cash flow after the payback period has payback period has occurred...

Question

The discounted payback period is similar to the payback period, except that it accounts for “_____________” by discounting the expected cash flows at the project’s cost of capital.

Question

The discounted payback period is similar to the payback period, except that it accounts for “_____________” by discounting the expected cash flows at the project’s cost of capital.

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