Discussion Post

This order is a discussion post, therefore must include an initial response to the prompt, and two secondary responses. These secondary responses of are students who have already replied to the initial post. These responses must be insightful and helpful to the student. The initial response MUST be completely answered. The order must adhere to APA format, include appropriate in-text citations, and it MUST include a reference page.
Example of in-text citation: (Last Name, Year of Publication, Paragraph Number/Page Number)

Initial Post,
Describe how the payback period is calculated and describe the information this measure provides about a sequence of cash flows. What is the payback criterion decision rule? What are the problems associated with using the payback period as a means of evaluating cash flows? What are the advantages of using the payback period to evaluate cash flows?

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Student Responses,
How is the payback period calculated? The payback period is calculated by dividing the initial investment or original cost of an asset by cash inflows. What information does the payback period measure provide about a sequence of cash flows? The payback period provides a break-even point of a series of cash flows. What is the payback criterion decision rule? The payback criterion decision rule is when you accept or reject a project based on a cutoff period. The payback criterion decision rule ignores cash flow beyond the cutoff period for the investment. What are the some of the problems associated with using the payback period method as a means of evaluating cash flows? The first problem is that it ignores the time value of money. The second problem is that it requires an arbitrary cutoff point. The third problem is that it ignores cash flows beyond the cutoff date. The fourth problem is that it is biased against long – term and new projects. What are some of the advantages of using the payback period to evaluate cash flows? The first advantage is that it is easy to understand. The second advantage is that it adjusts for uncertainty of later cash flows. The third advantage is that it is biased towards liquidity. The payback period is especially good for small businesses since it favors investments that free up cash for other uses quickly. The payback period is also good for larger businesses when they are making minor decisions that do not need a costly in depth analysis before making an investment.

The payback period represents the amount of time it takes for a capital budgeting project to recover its initial cost. The use of the payback period as a capital budgeting decision rule specifies that all independent projects with a payback period less than a specified number of years should be accepted. The payback is the point in time for the series of cash flows when the initial cash outlays are fully recovered. Given some predetermined cut off for the pay-back period. The payback decision rule accepts the project that payback before it is cut off and reject the project that the project takes longer time to payback.
Problems associated with using payback period:
The payback period ignores the time value of money.
The payback period ignores the benefits that occur after the payback period. It doesn’t measure the total income or profitability.
Advantages of payback period:
The payback period is straightforward to calculate and easy to understand
The payback period handles investment risk effectively.

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