#2 Payback Period - Investment Decision - Financial Management ~ B.COM / BBA / CMA
Saheb Academy・2 minutes read
The video focuses on capital budgeting techniques, specifically the payback period, to determine how quickly an initial investment can be recovered through project cash inflows. It illustrates the concept with a calculation example and emphasizes that projects with longer payback periods are less favorable, using a practical problem-solving scenario to recommend the machine with the shortest payback period.
Insights
- The payback period technique in capital budgeting evaluates how fast an initial investment can be recouped through project cash inflows, with projects over 3-4 years being less desirable.
- Using the payback period method, decision-makers can compare investment options based on the time it takes to recover the initial investment, favoring shorter payback periods for quicker returns.
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Recent questions
What is capital budgeting?
The process of evaluating long-term investment decisions.
How is the payback period calculated?
By dividing the initial investment by annual cash inflow.
What does a longer payback period indicate?
Less favorable investment option.
How is the payback period used in decision-making?
To recommend projects with shorter payback periods.
Why is cumulative cash flow analysis important in determining the payback period?
To accurately calculate the payback period when cash inflows are not equal.
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