Question

Payback Period [LO2] Concerning payback: a. Describe how the payback period is calculated, and describe the information this measure provides about a sequence of cash flows. What is the payback criterion decision rule? b. What are the problems associated with using the payback period to evaluate cash flows? c. What are the advantages of using the payback period to evaluate cash flows? Are there any circumstances under which using payback might be appropriate? Explain.

   Payback Period [LO2] Concerning payback:
a. Describe how the payback period is calculated, and describe the information this measure provides about a sequence of cash flows. What is the payback criterion decision rule?
b. What are the problems associated with using the payback period to evaluate cash flows?
c. What are the advantages of using the payback period to evaluate cash flows? Are there any circumstances under which using payback might be appropriate? Explain.

Fundamentals of Corporate Finance

Stephen A. Ross;… 11th Edition

Chapter 9, Problem 3

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Step 1

- To calculate the payback period, you sum the cash inflows from the investment until the total equals the initial investment cost. - For example, if an investment costs $10,000 and generates $2,500 annually, the payback period is $10,000 / $2,500 = 4 years. Show more…

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Payback Period [LO2] Concerning payback: a. Describe how the payback period is calculated, and describe the information this measure provides about a sequence of cash flows. What is the payback criterion decision rule? b. What are the problems associated with using the payback period to evaluate cash flows? c. What are the advantages of using the payback period to evaluate cash flows? Are there any circumstances under which using payback might be appropriate? Explain.

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