Payback Period Is Calculated As Research Proposal

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Its three-year payback is $16,000. The three-year payback for project B. is -$2,000, so that project should not be accepted.

5) The most commonly used capital budgeting procedures are the net present value (NPV) and the internal rate of return (IRR). After this comes payback period, although that is significantly less popular on account of its inability to account for the time value of money.

6) Although net present value (NPV) is the best method of capital budgeting in practice, there are many reasons why is not the only method used. For example, net present value is incomplete. The net present value method is strong, but it only accounts of time value of money and it is heavily reliant on estimates and assumptions. When put together, this reveals the inherent weaknesses of the NPV system. The method is strong for that which it does know, but is largely weak for that which it does not know.

NPV is also weak because it offers only one view of a project.

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In business, major projects carry substantial, high, stakes. These stakes make it entirely unreasonable that a firm should only look at one or two perspectives. For the managers making the decision, there are careers on the line. This means that decisions must be made based on a wide range of criteria. As a result, NPV is not the only method used to evaluate a major strategic project. In addition, there are a number of weaknesses inherent in such decision-making criterion. The net present value calculation, for example, is based on a comprehensive set of assumptions, some of which would be irrelevant or poor in the context of an NPV calculation.

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