Discounted Payback Period Calculation

A shorter discounted payback period indicates that the investment may be considered less risky, as the investor will recover their initial investment sooner.

The Accounting Rate of Return (ARR) method does not consider the time value of money or cash flow.

Investments with different Accounting Rates of Return (ARR) are typically ranked in order of the rate of earnings or accounting rate of returns.

<p>The discounted payback period considers the time value of money, while the regular payback period does not.</p> Signup and view all the answers

<p>Discounted Payback Period = Unrecovered Amount / Years Until Break-Even + 12 Cash Flow in Recovery Year</p> Signup and view all the answers

<p>The Accounting Rate of Return (ARR) method is also known as the 'accounting rate of return method' because it uses the accounting concept of profit rather than cash inflows.</p> Signup and view all the answers

<p>The primary criterion for evaluating the cash payback period is the company's criteria. A lower payback period indicates that the project recovers its investment quickly, suggesting a higher likelihood of profitability.</p> Signup and view all the answers

<p>The ARR method calculates the profitability of an investment proposal by dividing the average profit after tax (PAT) by the initial investment. A higher ARR indicates a higher cash inflow in the future, making the investment more attractive.</p> Signup and view all the answers

<p>A lower expected rate of return than the minimum rate implies that the investment may not be profitable, and management may decide to reduce or re-evaluate the investment in the project.</p> Signup and view all the answers

<p>The payback period analysis is significant in evaluating investment projects as it provides an estimate of the time it takes to recover the initial investment. This is related to the concept of discounted cash flow, which considers the time value of money and the present value of future cash flows.</p> Signup and view all the answers

<p>The IRR is a more comprehensive method that considers the time value of money and the present value of future cash flows, whereas the ARR is a simpler method that uses accounting information. The IRR is a more accurate method for evaluating investment projects.</p> Signup and view all the answers

<p>The NPV and IRR are related concepts, as the IRR is the rate at which the NPV becomes zero. Together, they can be used to evaluate investment projects by assessing the project's profitability and viability.</p> Signup and view all the answers

<p>ARR ignores time value of money, while DCF considers it.</p> Signup and view all the answers

<p>It is used as the discount rate in the calculation.</p> Signup and view all the answers

<p>Payback period ignores time value of money and only considers the time it takes to recover the initial investment.</p> Signup and view all the answers

<p>IRR is the discount rate at which the net present value equals zero; it is the rate at which the project breaks even.</p> Signup and view all the answers

<p>Because it allows for a more accurate comparison of projects with different cash flows and timing.</p> Signup and view all the answers