   Chapter 15, Problem 4CDQ

Chapter
Section
Textbook Problem

What information does the cash payback periodignore that is included by the net present valuemethod?

To determine

Concept Introduction:

Payback Period:

Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project.

NPV:

Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

NPV = Present value of cash inflows  Present value of cash out flows

To Indicate:

The information ignored by cash payback period method, and considered by Net Present value method.

Explanation

Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project.

Net present value (NPV) is the method to evaluate the project feasibility...

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