medium · Principles of Finance capital-budgeting
How does the discounted payback period resolve a specific 'failure mode' of the simple payback period?
- It incorporates the risk-adjusted cost of capital into the timing of cash flow recovery.
- It accounts for the 'scale' problem when comparing mutually exclusive projects.
- It eliminates the need for an arbitrary, management-chosen cut-off date for accepting a project.
- It provides a dollar-denominated measure of total shareholder wealth created by the project overall.
Sign up free to see the explanation and track your rank →
More Principles of Finance capital-budgeting practice
- Calculate the 'Profitability Index' for a project with an initial cost of 200,000 and a pr
- According to the Net Present Value criterion, which project should be chosen?
- If the required rate of return is 10%, what is the Net Present Value (NPV)?
- Which type of 'real option' is being exercised when a pharmaceutical company decides to bu
- If the cost of capital is 10%, what is the Net Present Value (NPV) of the project?
- A firm has FCFF of $100M, interest expense of $20M, a tax rate of 25%, and net new borrowi
- What is the Payback Period of the project?
- What is the Profitability Index (PI) and what does it indicate for capital rationing?