Which of the following is an advantage of the payback period method?

Which of the following is an advantage of the payback period method?

The most significant advantage of the payback method is its simplicity. It’s an easy way to compare several projects and then to take the project that has the shortest payback time.

Why do you use payback in project management?

It is a simple way to evaluate the risk associated with a proposed project. An investment with a shorter payback period is considered to be better, since the investor’s initial outlay is at risk for a shorter period of time. The calculation used to derive the payback period is called the payback method.

How can payback period be used to evaluate potential projects?

Figuring out the payback period is simple. It is the cost of the investment divided by the average annual cash flow. The shorter the payback, the more desirable the investment. Conversely, the longer the payback, the less desirable it is.

What is payback period with example?

The payback period is the time you need to recover the cost of your investment. For example, if it takes 10 years for you to recover the cost of the investment, then the payback period is 10 years. The payback period is an easy method to calculate the return on investment.

What is project payback period?

The payback period is the amount of time required for cash inflows generated by a project to offset its initial cash outflow. This calculation is useful for risk reduction analysis, since a project that generates a quick return is less risky than one that generates the same return over a longer period of time.

What are the advantages of payback period quizlet?

Advantages of the payback period include that it is easy to​ calculate, easy to​ understand, and that it is based on cash flows rather than on accounting profits. NPV is the most theoretically correct capital budgeting decision tool examined in the text.

What is meant by payback period?

The term payback period refers to the amount of time it takes to recover the cost of an investment. Simply put, the payback period is the length of time an investment reaches a break-even point. People and corporations invest their money mainly to get paid back, which is why the payback period is so important.

What is a good payback period?

As much as I dislike general rules, most small businesses sell between 2-3 times SDE and most medium businesses sell between 4-6 times EBITDA. This does not mean that the respective payback period is 2-3 and 4-6 years, respectively.

How do you work out payback period?

To determine how to calculate payback period in practice, you simply divide the initial cash outlay of a project by the amount of net cash inflow that the project generates each year. For the purposes of calculating the payback period formula, you can assume that the net cash inflow is the same each year.

What is payback period quizlet?

The payback period is best defined as: The time it takes to receive cash flows sufficient to cover your initial investment. A problem associated with the payback method is: It doesn’t consider cash flows after the payback period and it ignores the cost of money.

What is the main advantage of the discounted payback period method over the regular payback period method quizlet?

Discounted payback is an improvement on regular payback because it takes into account the time value of money. For conventional cash flows and strictly positive discount rates, the discounted payback will always be greater than the regular payback period.

What payback period is acceptable?

What Is an Acceptable Payback Period? The shortest payback period is generally considered to be the most acceptable. This is a particularly good rule to follow when a company is deciding between one or more projects or investments.

What are the advantages and disadvantages of a payback period?

Simple to Use. An advantage of using the payback method is its simplicity.

Screening Process. Companies often need to decide among several projects.

Time Value of Money. A disadvantage of the payback period is its disregard of money’s fluctuating value.

Cash Flow After Payback.

What is necessary to calculate payback period?

Payback period can be calculated by dividing an initial investment by annual cash flow from a project. The result is the number of years necessary to return the initial cost of the investment.

How do you calculate the payback period?

There are two ways to calculate the payback period, which are: Averaging method. Divide the annualized expected cash inflows into the expected initial expenditure for the asset. Subtraction method. Subtract each individual annual cash inflow from the initial cash outflow, until the payback period has been achieved.

How to calculate payback period [example]?

Enter all the investments required.

Enter all the cash flows.

Calculate the Accumulated Cash Flow for each period

For each period,calculate the fraction to reach the break even point.

Count the number of years with negative accumulated cash flows.

Find the fraction needed,using the number of years with negative cash flow as index.