Cave Kame
Karla Saenz
FIN3010
Dr.Mustafa Sayim
Chapters 8-10
Chapter 8: CTACR
If a project with conventional cash flows has a payback period less than its life, can you definitely state the algebraic sign of the NPV? Why or why not? No you cannot because you don't know wether there is a cutoff time or how long it will take to pay off the amount. Just because it will pay itself back does not mean it will be a positive investment to take in.
Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its profitability index. Its IRR? If a project has a positive NPV it means it will cover the initial investment so there will be an eventual payback period and some type of IRR.
Concerning payback:
a) Describe how the payback period is calculated and describe the information this measure provides about a sequence of cash flows. What is the payback criterion decision rule? The payback period is calculated by an investment that is acceptable based on the calculation period that is less than prespecified on a number of years. The measure of the sequence of cash flows gives us some insight into what our numbers will look like for the following years and we can make a decision based on these predictions.
b)What are the problems associated with using the payback period as a means of evaluating cash flows? It ignores the cash flows beyond the cutoff date.
c)What are the advantages of using the rule to evaluate cash flows? Are there any circumstances under which using payback might be appropriate? The advantage of the rule with cash flows is that it adjusts for uncertainty of later cash flows. Using the payback method may be appropriate if you just want an idea on how long it will take to get your bait back.
Concerning AAR:
a) Describe how the average accounting return is usually calculated and describe the information it provides about a sequence of cash flows. What is AAR criterion decision rule? The AAR method is
FIN3010
Dr.Mustafa Sayim
Chapters 8-10
Chapter 8: CTACR
If a project with conventional cash flows has a payback period less than its life, can you definitely state the algebraic sign of the NPV? Why or why not? No you cannot because you don't know wether there is a cutoff time or how long it will take to pay off the amount. Just because it will pay itself back does not mean it will be a positive investment to take in.
Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its profitability index. Its IRR? If a project has a positive NPV it means it will cover the initial investment so there will be an eventual payback period and some type of IRR.
Concerning payback:
a) Describe how the payback period is calculated and describe the information this measure provides about a sequence of cash flows. What is the payback criterion decision rule? The payback period is calculated by an investment that is acceptable based on the calculation period that is less than prespecified on a number of years. The measure of the sequence of cash flows gives us some insight into what our numbers will look like for the following years and we can make a decision based on these predictions.
b)What are the problems associated with using the payback period as a means of evaluating cash flows? It ignores the cash flows beyond the cutoff date.
c)What are the advantages of using the rule to evaluate cash flows? Are there any circumstances under which using payback might be appropriate? The advantage of the rule with cash flows is that it adjusts for uncertainty of later cash flows. Using the payback method may be appropriate if you just want an idea on how long it will take to get your bait back.
Concerning AAR:
a) Describe how the average accounting return is usually calculated and describe the information it provides about a sequence of cash flows. What is AAR criterion decision rule? The AAR method is