Answered: Why is an investment more attractive to…

Business

Accounting

Why is an investment more attractive to management if it has a shorter payback period?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 24Q: How does the size of the initial investment affect the internal rate of return on the net present...

See similar textbooks

Related questions

Q: What is the chief disadvantage of ROI as an investmentcenter performance measure? How does the…

Q: Conventional wisdom says that one should measure a manager’s investment performance over an entire…

A: The arguments to support or contradict the convention are:

Q: What happens to the company’s return on investment (ROI) as sales increase? Explain.

A: Return on investment (ROI) = Net profit / Total assets

Q: When do the firm expect to recover the initial investment?

A: The payback period alludes to what extent it takes for a speculator to hit breakeven to recoup the…

Q: Is it worth the effort to estimate daily project cash flows? Would doing so be helpful in the…

A: Cashflows are usually estimating yearly and then discounted at an appropriate discount rate

Q: What is the typical discount rate used with the Net Present Value (NPV) when project risk is the…

A: a) The rate of return the shareholders expected to get, or the rate at which the company borrows,…

Q: Is there any reason to believe that the project with the lower payback period is the better project?

A: Payback Period: It is the period in which the cost of the project is recovered. Hence, the shortest…

Q: What is a satisfactory investment? When the present value of benefits exceeds the cost of an…

A: Satisfactory investment refers to an investment wherein the present value of benefits after…

Q: Which of the following contributes positively to the value of a real option to delay investment?…

A: Real option:A real option is a selection made open to a firm's managers on prospects for business…

Q: Which projects should the manager choose? If you were given unlimited capital, which projects should…

A: Net Present Value is the difference between present value of cash inflows and present value of cash…

Q: How can we reduce investment risks by asset diversification?

A: Answer: Diversification is nothing but the strategy that reduces the risk by allocating assets to…

Q: Why is a firm’s value maximized if it invests to the point where its marginal return onnew…

A: The firm’s value is maximized when the Marginal return on new investment is equal to the kc because…

Q: What serious drawbacks do the much-used payback method of investmentscreening have?

A: The payback period alludes to what extent it takes for a speculator to hit breakeven to recoup the…

Q: Why does a company evaluate both the money allocated to a project and the time allocated to the…

A: "Since you have asked mutiple question we will be solving first question for you,If you want any…

Q: Are there conditions under which a firm might be better off if it were to choose a machine with a…

A: The question is based on the concept of capital budgeting and its techniques. Each method of capital…

Q: 3. Suppose your firm is going to finance a new investment project with only retained earnings. The…

A: Introduction: Risk free rate is the rate that an investor can receive without taking any chances or…

Q: The firm should accept a project if: the profitability index is greater than or equal to 1. the…

A: Capital budgeting is the process of evaluating the proposed projects and investments so that the…

Q: he investment with the higher payback period is better. Select one: True False

A: Payback period is the recovery of initial investment from the cash inflows from the investment.

Q: The expected value of an investment: Answer a. Is what the owner will receive when the investment is…

A: Expected Return refers to return anticipated by an investor while making investment. It may differ…

Q: Financial advisors generally recommend that their clients allocate more to higher risk–return asset…

A: M-V model represent as Mean-Variance model.

Q: What company is better in short term investment?

A: Answer:- Investment meaning:- An asset or object purchased with the intention of generating income…

Q: Which of the following would cause a project to have a lower net present value, thereby making the…

A: Capital budgeting techniques include: Net Present Value Proﬁtability Index Internal Rate of Return…

Q: Do you think investors should practice dollar cost averaging when investing their money? Why or why…

A: Dollar-Cost Averaging: Dollar-Cost averaging is an investment approach that involves investing an…

Q: Would a failure to recognize growth options tend to cause a firm’s actual capital budget tobe above…

A: If growth options are not considered, the real capital budget of a company will appear to rise…

Q: 3. Suppose your firm is going to finance a new investment project with only retained earnings. The…

A: Retained earnings is the income retained after paying dividend. It represents the capital remaining…

Q: How long does it take to recover the initial investment?

A: The payback period alludes to what extent it takes for a speculator to hit breakeven to recoup the…

Q: What logical arguments might you use to convince your boss to forego the project despite its high…

A: We should consider the qualitative factors of the project. It is possible that this project may…

Q: Should companies bid for a project with a price under the "project bid price"? No, this will not…

A: The project bid price is the final price of the project which the buyer is willing to pay.…

Q: why is knowledge of the money market important for carrying out value maximizing working capital…

A: Introduction: For this question, the importance of working capital which helps to manage the short…

Q: What effect would a decreased cost of capital have on a firm's future investments?

A: Cost of capital of the firm is its weighted average cost of capital. It considers the weighted…

Q: What are the shortcomings of the payback period?

A: Payback period: The payback period assesses the time period required to recover the initial…

Q: Which of the following performance measures will decrease if the minimum required rate of return…

A: Return on investment is the return earned by the investment on its investment. It is computed by…

Q: If the net present value of a proposed investment is negative, what is the discount rate used? Less…

A: Net present value (NPV) is the significant present value difference between cash outflows and cash…

Q: What is hedging and how is it different from diversification? If a firm needs to manage its risk,…

A: A hedge is an investment that is made fully intent on diminishing the danger of unfriendly value…

Q: What is the relationship between return on capital investment and the risk associated with the…

A: Return on invested capital is referred as an amount of the funds of the corporation, which helps in…

Q: The lower the cost in investment, the more likely people will be able to enter the market. TRUE OR…

A: Investment involves allocating money in different asset classes or securities with the expectation…

Q: 1. Why can’t diversification reduce systematic risk? 2. Why are sunk costs excluded when conducting…

A: “Since you have asked multiple questions, we will solve the first question for you. If you want any…

Question

Why is an investment more attractive to management if
it has a shorter payback period?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

What company is better in short term investment?
What is the investment center manager's preferred technique of calculating investment turnover, residual income, and return on investment? Why is it so popular? And why is the other not preferred? Briefly explain.
Conventional wisdom says that one should measure a manager’s investment performance over an entire market cycle. What arguments support this convention? What arguments contradict it?
A disadvantage of using the payback period to compare investmentalternatives is that it;
The amount of time needed to recoup one's initial investment is referred to as the payback period, and it is also the amount of time required for an investor to reach the point when they are no longer losing money. Investments with shorter payback periods are considered more desirable, whereas those with longer payback periods are seen as less desirable. Imagine that you are the Chief Financial Officer. Critically evaluate the use of cash payback method (advantages and disadvantgaes) in determining the investment decisions with sufficient cash flow to ensure business sustainability in a competitive environment.
Which of the following will not result in an increase in return on investment (ROI), assuming other factors remain the same?
The lower the cost in investment, the more likely people will be able to enter the market. TRUE OR FLASE?
What is the relationship between return on capital investment and the risk associated with the anticipated sales of the product for which a new method will be used? Discuss.
Explain and give an example as to how a manager can manipulate the return on investment figure in the short run. Why are these manipulations bad for the company in the long run? Suggest some alternative performance evaluation and compensation schemes.
What is the most preferred method of an investment center manager among investment turnover, residual income, and return on investment? Why is it most preferred? And why is the other not preferred? Explain briefly.
What is the simple payback period? What is the net present value of the investment? What is the modified internal rate of return for the investment?
Financial advisors generally recommend that their clients allocate more to higher risk–return asset classes (like equities) if their investment horizons are long. Is this advice consistent with the basic M-V model? Does adding a shortfall constraint to the M-V model make a difference? If so, how? If not, why not? Assuming investment opportunities change over time, what type of asset return behavior would justify this advice within the M-V framework?