Discounted Payback Period Approach

Question 1

Identify the advantages of the discounted payback period approach to capital budgeting evaluation.

Answer 1

1. Easy to use and understand
2. Uses time value of money approach
3. Useful in evaluation liquidity of a project
4. Use of a short payback period reduces uncertainty

Question 2

Identify the disadvantages of the discounted payback period approach to capital budgeting evaluation.

Answer 2

1. Ignores cash flows received after the payback period
2. Does not measure total project profitability
3. Maximum payback period may be arbitrary

Question 3

Describe the discounted payback period approach to capital budgeting evaluation.

Answer 3

A variation of the payback period approach that takes the time value of money into account by discounting expected future cash flow.s

Question 4

Will the payback period from using the discounted payback period approach be longer or shorter than using undercounted payback period approach (to capital budgeting)?

Answer 4

The discounted payback period will be longer than the undiscounted payback period because the present value of cash flows will be less than the undercounted values.