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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

What are three potential flaws with the regular payback method? Docs the discounted payback method correct all three flaws? Explain.

Summary Introduction

To explain: The three potential flaws with regular payback method and whether the discounted payback method corrects all three flaws.

Introduction:

Payback Period:

It refers to the time period that is required to get an amount invested in a project with some return on it. In other words, it is the time that a project takes to repay the amount invested with some return attached to it.

Discounted Payback Period:

It refers to the time that a project takes to repay the amount invested with some return attached to it after considering the time value of money or discounted cash flows.

Explanation
  • Since, regular payback period tells only the time period in which the amount will be repaid with some return the time value of money is not considered that is decrease in the value of money with the increase in time due to inflation.
  • Since, in regular payback period the company rejects all the projects that have payback period more than the company’s decided payback period it could lead to the rejection of a project with higher returns after the payback period...

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Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)