Evaluation and Techniques - Payback period approach

Question 1

Payback period PPA

Answer 1

Number of years needed to recover initial cash investment in a project and compares that time with a pre-established maximum payback period

If payback period is greater than project is rejected

Ignores time value of money (uses nominal values)

Ignores cash flows after payback period

Does not measure total project profitability

Question 2

Specific Considerations

Answer 2

Depreciation expense does not create a cash flow; it is not considered in the cash - approach base don cash flows;

TAX SHIELD is however considered as it does affect cash outflow
Residual Value is not considered as any cash flow associated with the project after the maximum period is not relevant