What are the advantages and disadvantages of discounted payback period?
It helps a company to determine whether to invest in a project or not. If the discounted payback period of a project is longer than its useful life, the company should reject the project. One of the disadvantages of discounted payback period analysis is that it ignores the cash flows after the payback period.
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.
What are the merits and demerits of payback method?
(a) It ignores annual cash flow: Pay-back method totally ignores the annual cash inflow after the pay-back period. (b) It considers only the period of pay-back: Pay-back method does not consider the pattern of cash inflows or the magnitude and timing of cash inflows.
What are some of the limitations and disadvantages in using the payback period method?
Disadvantages of Payback Period
- Only Focuses on Payback Period.
- Short-Term Focused Budgets.
- It Doesn’t Look at the Time Value of Investments.
- Time Value of Money Is Ignored.
- Payback Period Is Not Realistic as the Only Measurement.
- Doesn’t Look at Overall Profit.
- Only Short-Term Cash Flow Is Considered.
What is the main advantage of the discounted payback period method over the regular payback period method?
More accurate than the standard payback period calculation, the discounted payback period factors in the time value of money. The discounted payback period formula shows how long it will take to recoup an investment based on observing the present value of the project’s projected cash flows.
What are the limitations of payback period method?
Limitations of using the Payback Period in evaluating an…
- Cash Flows after Payback. The payback period fails to consider the cash inflows after the payback period is over.
- Cash Flows Ignored.
- Cash Flow Patterns.
- Administrative Problems.
- Independent of Shareholders’ Value Maximization.
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 are the advantages and disadvantages of accounting rate of return?
What are the advantages and disadvantages of using the accounting rate of return?
| Advantages | |
|---|---|
| 2 | It is easy to calculate and understand the payback pattern over the economic life of the project |
| 3 | It shows the profitability of an investment and helps to measure the current performance of the project |
Which is not an advantage of payback period?
Ignores Time Value of Money This is among the major disadvantages of the payback period that it ignores the time value of money, which is a very important business concept.
What are the weaknesses of the payback method?
The two major weaknesses of the payback method are: • the time value of money is not considered; • the cash flows after the investment is recovered are not considered. the time value of money is not considered; the cash flows after the investment is recovered are not considered.
What advantage S does the discounted payback have over the ordinary payback?
Advantages. Many managers in the organization prefer discounted payback period because it considers the time value of money while calculating the payback period. It determines the actual risk involved in a project and whether the investments made are recoverable or not.
Which of the following is an advantage of the discounted payback period?
Advantages. Discounted payback period helps businesses reject or accept projects by helping determine their profitability while taking into account the time-value of money. This is done via the decision rule: If the DPB is less than its useful life, or any predetermined period, the project can be accepted.
Which of the following is a disadvantage of the payback period rule?
Ignores the time value of money: The most serious disadvantage of the payback method is that it does not consider the time value of money. Cash flows received during the early years of a project get a higher weight than cash flows received in later years.
What is the advantage of the accounting rate of return method?
Merits of Using ARR Simplicity − The ARR method is one of the easiest methods to evaluate an investment. Unlike NPV and IRR methods, it does not involve critical and complex computations. Moreover, being simple to understand, ARR is widely used for audiences who have less knowledge of finance.
What are limitations of payback method?
Limitations of Payback Period Analysis The first is that it fails to take into account the time value of money (TVM) and adjust the cash inflows accordingly. The TVM is the idea that the value of cash today will be worth more than in the future because of the present day’s earning potential.
What are the advantages and disadvantages of the average accounting return?
Advantages; It is easier to calculate than other capital budgeting decision rules. It only needs net income data and book values of the investment during its life. Another advantage is needed information will usually be available. Disadvantage; it does not take time value of money into account.