Principles of Finance · free preview
The Payback Period Method
The payback period measures how quickly a project recovers its initial cost from its cash flows, it is simple and liquidity-focused, but it ignores the time value of money and everything happening after the payback date.
1. The method defined
The method defined
2. The ignored time value
The ignored time value
3. The ignored later years
The ignored later years
4. Where payback earns its place
Where payback earns its place
5. Computing payback
A project costs 100,000 dollars and returns 40,000 dollars per year. What is its payback period?
6. The liquidity logic
Why do cash-constrained companies find the payback period method naturally appealing?
7. The time value flaw
What is the payback method's first fundamental flaw, from the standpoint of this course?
8. The post-payback blindness
Two projects both pay back in 2.5 years, but one keeps earning for a decade after recovery while the other stops immediately. How does payback rank them?
9. Discounted payback's repair
What does the discounted payback method fix relative to the plain version?
10. Payback's proper job
According to the lesson, what is the payback method's disciplined place in modern capital budgeting?
11. The cutoff's blind spot
Payback ignores all cash flows occurring after the recovery date, a flaw known as post-payback what? Answer with one word.
12. The repaired version
What two-word term names the payback variant that discounts cash flows before accumulating them? Answer in lowercase.
13. The screen's focus
What one-word term names the attribute payback prices, the availability of cash when operations need it? Answer in lowercase.
14. The standard it supports
What three-word method, developed in the next lesson, provides the value-correct standard payback screens support? Answer in lowercase.
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