Capital Budgeting

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Kelly K


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October 3, 2011








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The number of years is the payback period. To evaluate this method, the manager must have in mind a particular number of years that is acceptable to the firm. If the payback period is less than or equal to that predetermined number, then the project is accepted. Payback Method for Strident Marks Project Period 0 Initial Investment -$10,000 1 Cash Flow $7,500 Remaining -$2,500 2 Cash Flow $7,500 Remaining $5,000 3 Cash Flow $7,500 Remaining $12,500 Solution: Payback (in years) = 1 + (5,000/7,500) Payback = 1...
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If the proposed project's payback exceeds the acceptable time limit, then the project is accepted. Otherwise, the project is rejected. The problem with the payback method is that this method does not consider cash flows that occur after the payback period, nor does it consider time value of money (Gallagher, 2003)...
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