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3.8 INVESTMENT APPRAISAL - Coggle Diagram
3.8 INVESTMENT APPRAISAL
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The Payback Period
Payback is ‘The time required for the cash inflows from the capital investment project to equal the cash outflows’. This method attempts to forecast how long it will take for the expected net cash inflows to pay back the net investment outlays (what money was initially put into the venture).
Disadvantages of payback
It ignores the timing of cash flows within the payback period, the cash flows after the end of the payback period and therefore the total project return
● It ignores the time value of money. This means that it does not take account of the fact that $1 today is worth more than $1 in one year’s time.
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● It takes account of the risk of the timing of cash flows but does not take account of the variability of those cash flows.
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