Fortifying The Payback Period Method For Alternative Cash Flow Patterns
Fortifying The Payback Period Method For Alternative Cash Flow Patterns
Fortifying The Payback Period Method For Alternative Cash Flow Patterns
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1. Fortifying The Payback Period Method For Alternative Cash Flow Patterns...............................................
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Fortifying The Payback Period Method For Alternative Cash Flow Patterns
Author: Avery, Albert E; Flaherty, Susan M V; Rhee, Moon-Whoan
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Abstract: According to the literature, the payback period method is often used along with net present value
(NPV) and internal rate of return (IRR) for evaluation of capital projects. Despite its simple and intuitive
approach, the payback method has been criticized in the literature for its failure to consider the cash flows
beyond the payback period. Since it is difficult to project future cash flows accurately, investment proposals with
a short payback may be more attractive to the practitioner than suggested by NPV or IRR. In addition, growth
rates are very common to the vernacular of business, so there may be particular advantage to incorporation of
cash flow growth rates into the calculation of the payback period. A two fortified payback calculations can be
used to summarize projected future cash flows, and they are easily to compute. The first is based on the ratio of
the initial outlay to the first period cash flow and the projected cash flow growth rate. The resulting payback
periods behave as one would expect with respect to this ratio, varying growth rates and the subsequent
augmentation of the computation to include discounted cash flow. [PUBLICATION ABSTRACT]
Subject: Studies; Payback periods; Internal rate of return; Net present value; Cash flow;
Classification: 9130: Experiment/theoretical treatment; 3100: Capital & debt management
Publication title: Journal of Financial and Economic Practice
Volume: 11
Issue: 2
Pages: 1-9
Number of pages: 9
Publication year: 2011
Publication date: Fall 2011
Year: 2011
Publisher: Bradley University
Place of publication: Peoria
Country of publication: United States
Publication subject: Business And Economics--Banking And Finance, Business And Economics--Economic
Systems And Theories, Economic History
ISSN: 19376820
Source type: Scholarly Journals
Language of publication: English
Document type: Feature
Document feature: Tables References Graphs Equations
ProQuest document ID: 1025765031
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Bibliography
Citation style: Harvard
Albert, E.A., Susan, M.V.F. & Moon-Whoan Rhee 2011, "Fortifying The Payback Period Method For Alternative
Cash Flow Patterns", Journal of Financial and Economic Practice, vol. 11, no. 2, pp. 1-9.
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