Payback period

Organizations are often faced with the opportunity (or need) to invest in assets or projects that represent long-term commitments. Capital investment decisions are concerned with the process of planning, setting goals and priorities, arranging financing, and using certain criteria to select long-term assets. The process of making capital investment decisions is often referred to as - Select your answer -opportunity costingcapital budgetingshort-term planningItem 1 . Two types of capital investment projects will be considered: (1) independent projects, and (2) mutually exclusive projects. - Select your answer -Independent projectsMutually exclusive projectsItem 2 are those projects that, if accepted or rejected, do not affect the cash flows of other projects. - Select your answer -Independent projectsMutually exclusive projectsItem 3 are those projects that, if accepted, preclude the acceptance of all other competing projects.

Models used for making capital investment decisions fall into two major categories: nondiscounting models and discounting models. - Select your answer -DiscountingNondiscountingItem 4 models ignore the time value of money, whereas - Select your answer -discountingnondiscountingItem 5models explicitly consider it. One type of - Select your answer -discountingnondiscountingItem 6 model is the payback period. The payback period is the time required for a firm to recover its original investment. When the cash flows of a project are assumed to be even, the following formula can be used to compute the project's payback period:

Payback period = Original Investment/Annual cash flow

If, however, the cash flows are uneven, the payback period is computed by adding the annual cash flows until such time as the original investment is recovered.

The payback period may be useful to help assess such things as (Select "Yes" for the statements that are applicable and "No" for the items that do not apply):

The impact of an investment on liquidity	- Select your answer -YesNoItem 7
The time value of money	- Select your answer -YesNoItem 8
Obsolescence risk	- Select your answer -YesNoItem 9
The profitability of an investment	- Select your answer -YesNoItem 10
Financial risk	- Select your answer -YesNo Item 11