Essay on The Payback Period For Project

Essay on The Payback Period For Project

Length: 827 words (2.4 double-spaced pages)

Rating: Better Essays

Open Document

Essay Preview

a) Based on payback period, the payback period for Project (A) is 2.66 years and the payback period for Project (B) is 2.02 years. That means Project (A) will recoup its initial investment in 2.66 years and Project (B) will recoup its initial investment in 2.02 years. The company should choose Project (B) because the payback period for Project (B) is shorter than the payback period for Project (A) and is less than the 4 years maximum payback requires by the company. The shorter and quickest the payback period of a project and with a payback period less than a specified number of years should be accepted (Kaplan Higher Education Study Guide, 2015, p. 74). In addition, the project with a shortest payback period has less threat than with the project with longer payback period. They allow the company to regain the investment more rapidly so that the company can reinvest the money somewhere else. The payback period represents the total of time that it takes for a Capital Budgeting project to recover its primary cost.

b) Based on Net Present Value (NPV), The NPV for Project (A) is $21,152.94 and the NPV for Project (B) is $7,783.10. The company should choose Project (A) because Project (A) has the larger NPV compared to Project (B). The general rule is that when NPV is positive, the project should be accepted because projects with a positive NPV are expected to increase the value of the firm or shareholder wealth, on the other hand, when the NPV is negative, the project should not be undertaken because the investment will not add value to the firm (Kaplan Higher Education Study Guide, 2015, p. 71); in the case of mutually exclusive projects, the project with the highest Net Present Value should be accepted. Thus, NPV makes the decisio...


... middle of paper ...


...of money and the value of cash flows in future periods. In addition, the NPV approach has no significant flaws (Kaplan Higher Education Study Guide, 2015, p. 94) and is the desired method for appraising projects because it considers risk and the time value of money, and has no random cut-off. NPV is easy to use, easily comparable, and customizable. Only if all alternatives are discounted to the same point in time, NPV allows for simple comparison between investment alternatives. It provides clear-cut decision suggestion for investments. The NPV rule also effortlessly handles both mutually exclusive and independent projects compared to IRR which can’t be used for exclusive projects or those of different period of time, IRR may exaggerate the rate of return and also profitability index which may not give the right choice when used to compare mutually exclusive projects.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Essay on Strategic Corporate Finance Analysis

- A combination of payback period, Net Present Value and IRR methods is a suitable way of measuring a project’s appropriateness. By providing a way of picking the most suitable project in consideration of the expected payback time, expected return and cost of capital. (Vinci, 2010) In that respect, the project’s choice is made by considering the three methods evaluation that can be summarized as follows. Pay back method The method entails evaluating projects in terms of the number of years that it would take for the invested capital to be paid back....   [tags: payback period,irr method,net present value]

Better Essays
1681 words (4.8 pages)

The Retscreen Simulation Outcome And Actual Statistics Of Chongming Energy System

- The comparison of the RETScreen simulation outcome and actual statistics of Chongming energy system in 2014 is presented in Table 6. It is observed that the simulation results is in high coincidence with the actual statistics, and both the differences in the power generation and GHG emission are ∼3%, indicating that the model can be used to simulate the energy system of Chongming County accurately. 3.2 Equipment optimization 3.2.1 Wind scenario As shown in Table 7, the type selection of 800 ×1 MW products more electricity with the value of 0.981 TWh....   [tags: Net present value, Payback period, Finance]

Better Essays
756 words (2.2 pages)

Net Present Value and Other Investment Criteria Essays

- The purpose of this paper is to explain the importance of net present value along with other investment criteria used in determining the value of business decisions regarding today’s investments for future returns. The paper will define what is meant by net present value and show how managers can use it as an analysis tool to decide if an investment is worth the calculated risk. Also, there will be three methods discussed that managers can use to propose the best financial projects to invest in to increase revenue for its owners....   [tags: corporate profits, financial projects, payback]

Better Essays
1220 words (3.5 pages)

Project Management - Verizon Wireless Billing System Integration Essay

- INTRODUCTION Currently, Verizon Wireless has two major billing systems: I2K and VISION. In accordance with the strategic goals of the company and taking into consideration the corporate vision and credo, the executive management decided that having one billing system would be congruent with the objectives of the organization as a whole and the IT group in particular. After several months of deliberation, using techniques such as brainstorming, receiving expert opinions of SME (Subject Matter Experts) and taking into consideration the Payback period and ROI (Return on Investment) it was decided that the I2K customers would be converted into the VISION billing system....   [tags: IT Project Management Software]

Better Essays
1926 words (5.5 pages)

Essay on Project D. Initial Investment Appraisal

- Q1. Investment appraisal (a) Project A Project B Project C Project D Initial investment $120000 $160000 $90000 $70000 Annual cash flow ($40000-$16000-$12000) $12000 ($75000-$27000-$16000) $32000 ($60000-$15000-$9000) $36000 ($60000-$18000-$7000) $85000 Payback period: initial investment/ annual cash flow 120000/12000 10 years 160000/32000 5 years $90000/36000 2.5 years $70000/85000 2 years Project C and D are acceptable as both of their payback periods are less than the pre specified number of years which is 3 years in this case....   [tags: Balance sheet]

Better Essays
1941 words (5.5 pages)

Essay about A Project On Capital Budgeting

- a. Capital budgeting is the method used to determine whether a firm should invest in a project. To determine if a project should be invested in, firms use methods such as net present value and internal rate of return to analyze the projected cash flows. Firms should choose projects that increase its value. b. An independent project is a project that is not affected by the acceptance or rejection of another project. Mutually exclusive projects are projects that are affected by the acceptance of another project....   [tags: Net present value, Internal rate of return]

Better Essays
1308 words (3.7 pages)

Essay on A Project On Capital Budgeting

- a. Capital budgeting is how a firm decides whether it should invest in a project. To determine if a project should be invested in, firms use methods such as net present value and internal rate of return to analyze the projected cash flows. Firms should choose projects that increase its value. b. An independent project is a project that is not affected by the acceptance or rejection of another project. Mutually exclusive projects are projects that are affected by the acceptance of another project....   [tags: Net present value, Internal rate of return]

Better Essays
1351 words (3.9 pages)

Project Selection Process For The Startup Essays

- For the given hypothetical scenarios of getting more than expected fund for our startup, let us assume that the startup is about delivering IT services like customized software development for small to medium scale businesses from different countries. Other than the funding, it requires resources like skilled employees, suitable IT development environment for working on such project. It is assumed that the funding is adequate to arrange such resources. Keeping that in mind, the project selection process is discussed here....   [tags: Net present value, Cash flow]

Better Essays
791 words (2.3 pages)

Evaluation Of A Project Proposal Essay

- One of the biggest decisions organizations have to make is related to the projects they agree to undertake. Once a project proposal has been submitted to the organization, there are many factors that need to be considered before the project is approved to begin. The selection process is a process to assess each project idea and select the project with highest priority. It can be simple or more involved depending on what the organization uses a method for selection. Choosing a project using the right method is therefore of the greatest importance....   [tags: Net present value, Internal rate of return]

Better Essays
748 words (2.1 pages)

Essay on Understanding of PMIs Project Management Processess

- The processes can generally be structured into groups or knowledge areas. In this paper the processes are structured by their area of expertise and involve all project managing processes. The processes and knowledge areas are based on the Project Management Institute which is a widely accepted guide for project management. The knowledge areas are (Ó Conchúir, 2012): • Integration management • Scope management • Time management • Cost management • Quality management • Human Resource management • Communication management • Risk management • Procurement management In the following section, an overview of the processes is given....   [tags: Integration Management, Scope Management]

Better Essays
1191 words (3.4 pages)