Question
While reading Chapter 4 of Ivo Welch's Corporate Finance book, I found some of his comments about the Payback-Capital Budgeting rule both amusing and disconcerting.
While reading Chapter 4 of Ivo Welch's Corporate Finance book, I found some of his comments about the Payback-Capital Budgeting rule both amusing and disconcerting. On page 68, he writes,
"...after IRR and NPV, the most commonly used capital-budgeting rule is a 'practical one,' the payback rule. You need to know why you should not fall for it. Under the payback rule, projects are assumed to be better if you can recover their original investment faster. For the most part, this is a stupid idea."
What about you? What do you think of this passage from the book? Do you agree? Disagree? Do you have any stories of your own to illustrate?
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