ADMN 3021H Lecture Notes - Lecture 11: Net Present Value, Capital Budgeting, Cash Flow
30 Mar 2020
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Document Summary
Learning objectives: discuss capital budgeting inputs and apply the cash payback technique, explain the net present value method, explain the internal rate or return method, describe the annual rate of return method. The cash payback technique identifies the time period required to recover the cost of the capital investment from the annual cash inflow produced by the investment. The formula for computing the cash payback period is: Cash payback period = cost of capital investment / net annual cash flow. When the payback technique is used the shorter the payback period, the more attractive the investment. Advantages: easy to understand, biased towards liquidity. Ignores the time value of money: requires an arbitrary cutoff point. Ignores cash flows beyond the cutoff date: biased against long-term projects, such as research and development, and new projects. The present value method technique is generally recognized as the best conceptual approach to making capital budgeting decisions.
