123 School Work

Net Present Value

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  The payback period stinks. payback period is defined as the length of time required for an investment's net revenues to cover its cost, i.e. The number of periods of after tax cash flows required to recover the initial investment.You would chose to do the deal if the expected payback period is less than the required payback period. One of the problem is that payback period is arbitrarily chosen and there is no way to know what the required payback period is. This method does not consider the cost of capital no cost for the debt or equity used to undertake the project is reflected in the cash flows or the calculation. During the PB we assume the discount rate to be zero. So there is no adjustment for time value of money. This method does not take into account the cash flows that are paid or rcvd after the payback period, so even if a project had a cash flows of a zillion dollars, then after the payback period, that would not be taken into account...