Question
Some people have suggested combining the payback period (PBP) method with present value analysis to calculate a discounted payback period (DPBP). Instead of using cumulative
Some people have suggested combining the payback period (PBP) method with present value analysis to calculate a "discounted" payback period (DPBP). Instead of using cumulative inflows, cumulative present values of inflows (discounted at the cost of capital) are used to see how long it takes to "pay" for a project with discounted cash flows. For a firm not subject to a capital rationing restraint, if an independent project's "discounted" payback period is less than some maximum acceptable "discounted" payback period, the project would be accepted; if not, it would be rejected. Assume that an independent project's "discounted" payback period is greater than a company's maximum acceptable "discounted" payback period but less than the project's useful life; would rejection of this project cause you any concern? Why? Does the "discounted" payback period method overcome all the problems encountered when using the "traditional" payback period method? What advantages (if any) do you see the net present value method holding over a "discounted" payback period method?
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