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Non-discounting methods - Coggle Diagram
Non-discounting methods
Payback period
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Where annual cash flows are uneven, the cumulative cash flow over the life of the project is used to calculate the payback period
Decision rules
A project is accepted when it pays back the original investment within the specified time period or a target period, the company must therefore set a target payback period
When choosing between mutually exclusive projects, the project with the shortest payback should be chosen
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The longer the payback period, the more uncertain the cash flows and the forecast are likely to be
Advantages
The payback period uses cash flows, not profits
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Disadvantages
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It is very subjective as it gives no definitive investment answer to help managers decide whether or not to invest
It ignores the timings of the cash flows, this can be resolved using the discounted payback period which accounts for the time value of money
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