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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

Why might it be rational for a small firm that does not have access to the capital markets to use the payback method rather than the NPV method?

Summary Introduction

To explain: The reason for a small firm to be rational to use the payback method rather than the NPV method.

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.

Net Present Value (NPV):

It is a method under capital budgeting which includes the calculation of net present value of the project in which company is investing. The calculation is done by calculating the difference between the value of cash inflow and value of cash outflow after considering the discounted rate.

Explanation
  • Since through payback period the time of the payback of the total amount invested could be known, it provides a small firm an idea regarding the time period in which it will have its money back. The shorter the payback period the profitable it would be for the firm...

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