What is discounted payback period and its advantages and disadvantages?

What are the advantage of discounted payback period?

Advantages. Discounted payback period helps businesses reject or accept projects by helping determine their profitability while taking into account the time-value of money. This is done via the decision rule: If the DPB is less than its useful life, or any predetermined period, the project can be accepted.

What are the main disadvantages of discounted payback period?

Disadvantages. Calculation of payback period using discounted payback period method fails to determine whether the investment made will increase the firm’s value or not. It does not consider the project that can last longer than the payback period. It ignores all the calculations beyond the discounted payback period.

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What is discounted payback period?

The discounted payback period is a capital budgeting procedure used to determine the profitability of a project. A discounted payback period gives the number of years it takes to break even from undertaking the initial expenditure, by discounting future cash flows and recognizing the time value of money.

What is the advantages and disadvantages of payback period?

Payback period advantages include the fact that it is very simple method to calculate the period required and because of its simplicity it does not involve much complexity and helps to analyze the reliability of project and disadvantages of payback period includes the fact that it completely ignores the time value of …

What is the main disadvantage of discounted payback is the payback method of any real usefulness in capital budgeting decisions?

Disadvantages of the Payback Method

Ignores the time value of money: The most serious disadvantage of the payback method is that it does not consider the time value of money. … Ignores a project’s profitability: Just because a project has a short payback period does not mean that it is profitable.

What are the advantages and disadvantages of discounted cash flow?

Doesn’t Consider Valuations of Competitors: An advantage of discounted cash flow — that it doesn’t need to consider the value of competitors — can also be a disadvantage. Ultimately, DCF can produce valuations that are far from the actual value of competitor companies or similar investments.

What is the difference between Payback and discounted payback?

The payback period is the number of years necessary to recover funds invested in a project. … The discounted payback period is the number of years after which the cumulative discounted cash inflows cover the initial investment.

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What are the advantages of discounted cash flow?

A big advantage of the discounted cash flow model is that it reduces an investment to a single figure. If the net present value is positive, the investment is expected to be a moneymaker; if it’s negative, the investment is a loser. This allows for up-or-down decisions on individual investments.

What are the advantages and disadvantages of net present value?

Advantages and disadvantages of NPV

NPV Advantages NPV Disadvantages
Incorporates time value of money. Accuracy depends on quality of inputs.
Simple way to determine if a project delivers value. Not useful for comparing projects of different sizes, as the largest projects typically generate highest returns.

Which is a better indicator discounted payback or payback period?

Payback period does not account for the effect of time value of money. Discounted payback period accounts for the effect of time value of money. Discounted payback period uses discounted cash flows, thus is more accurate compared to payback period.

How do you calculate discounted payback period?

DPP = y + abs(n) / p,

y = the period preceding the period in which the cumulative cash flow turns positive, p = discounted value of the cash flow of the period in which the cumulative cash flow is => 0, abs(n) = absolute value of the cumulative discounted cash flow in period y.

How do you find the discount period?

The discount period is the period between the last day on which the discount terms are still valid and the date when the invoice is normally due. For example, if the discount must be taken within 10 days, with normal payment due in 30 days, then the discount period is 20 days.

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What are the disadvantages of payback period?

Disadvantages of Payback Period

  • Only Focuses on Payback Period. …
  • Short-Term Focused Budgets. …
  • It Doesn’t Look at the Time Value of Investments. …
  • Time Value of Money Is Ignored. …
  • Payback Period Is Not Realistic as the Only Measurement. …
  • Doesn’t Look at Overall Profit. …
  • Only Short-Term Cash Flow Is Considered.

What are advantages of payback period quizlet?

Advantages of the payback period include that it is easy to​ calculate, easy to​ understand, and that it is based on cash flows rather than on accounting profits. NPV is the most theoretically correct capital budgeting decision tool examined in the text.

What are the advantages of the payback period method for management quizlet?

What are the advantages of the payback period method for management? -The payback period method is easy to use. -It allows lower level managers to make small decisions effectively. -The payback period method is ideal for minor projects.