Quick Answer: What are the two main disadvantages of discounted payback?

Disadvantages. Calculation of payback period using discounted payback period method fails to determine whether the investment made will increase the firm’s value or not. It does not consider the project that can last longer than the payback period. It ignores all the calculations beyond the discounted payback period.

What is the main disadvantage of discounted payback is the payback method of any real usefulness in capital budgeting decisions?

B) What are the problems associated with using the discounted payback period to evaluate cash flows? The primary disadvantage to using the discounted payback method is that it ignores all cash flows that occur after the cutoff date, thus biasing this criterion towards short-term projects.

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What are the advantages and disadvantages of using the payback method?

Payback period advantages include the fact that it is very simple method to calculate the period required and because of its simplicity it does not involve much complexity and helps to analyze the reliability of project and disadvantages of payback period includes the fact that it completely ignores the time value of …

What are the advantages and disadvantages of discounted cash flow?

Doesn’t Consider Valuations of Competitors: An advantage of discounted cash flow — that it doesn’t need to consider the value of competitors — can also be a disadvantage. Ultimately, DCF can produce valuations that are far from the actual value of competitor companies or similar investments.

What are the advantages of using discounted payback period?

Advantages. Discounted payback period helps businesses reject or accept projects by helping determine their profitability while taking into account the time-value of money. This is done via the decision rule: If the DPB is less than its useful life, or any predetermined period, the project can be accepted.

What is a major disadvantage of the discounted payback method?

Ignores the time value of money: The most serious disadvantage of the payback method is that it does not consider the time value of money. Cash flows received during the early years of a project get a higher weight than cash flows received in later years.

Which of the following is a disadvantage of the discounted payback period method?

Explanation: The main disadvantage of the payback period is the ignorance of the time value of money in the computations. As a result, the outcome is not in the present value terms and is, therefore, misleading. To overcome this drawback, a discounted payback period has been created.

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What are the disadvantages of NPV?

The biggest disadvantage to the net present value method is that it requires some guesswork about the firm’s cost of capital. Assuming a cost of capital that is too low will result in making suboptimal investments. Assuming a cost of capital that is too high will result in forgoing too many good investments.

What are the advantages and disadvantages of net present value?

Advantages and disadvantages of NPV

NPV Advantages NPV Disadvantages
Incorporates time value of money. Accuracy depends on quality of inputs.
Simple way to determine if a project delivers value. Not useful for comparing projects of different sizes, as the largest projects typically generate highest returns.

What question is the payback period model answering what are the two major drawbacks of the payback period in what situations do businesses still use it?

In what situation do businesses still use it? Payback period answers the question, “how soon will I recovered my initial investment (money)?” The two major drawbacks are, it ignores all cash flow after the initial cash flow is recovered and it ignores the time value of money.

What are the disadvantages of discounted cash flows?

The main Cons of a DCF model are:

  • Requires a large number of assumptions.
  • Prone to errors.
  • Prone to overcomplexity.
  • Very sensitive to changes in assumptions.
  • A high level of detail may result in overconfidence.

What are the criticisms against the discounted cash flow methods?

General Criticisms against DCF Techniques:

ADVERTISEMENTS: Further with the development of mechanized accounting and computer technology it has become very easy to operate. 2. The second assumption is against the assumption of a fixed investment rate throughout the life of the project.

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What are the advantages of discounted cash flows?

A big advantage of the discounted cash flow model is that it reduces an investment to a single figure. If the net present value is positive, the investment is expected to be a moneymaker; if it’s negative, the investment is a loser. This allows for up-or-down decisions on individual investments.

What are the disadvantages of payback period?

Disadvantages of Payback Period

  • Only Focuses on Payback Period. …
  • Short-Term Focused Budgets. …
  • It Doesn’t Look at the Time Value of Investments. …
  • Time Value of Money Is Ignored. …
  • Payback Period Is Not Realistic as the Only Measurement. …
  • Doesn’t Look at Overall Profit. …
  • Only Short-Term Cash Flow Is Considered.

What is the difference between discounted payback and payback period?

The payback period is the number of years necessary to recover funds invested in a project. … The discounted payback period is the number of years after which the cumulative discounted cash inflows cover the initial investment.

What are the advantages and disadvantages of accounting rate of return?

What are the advantages and disadvantages of using the accounting rate of return?

Advantages
2 It is easy to calculate and understand the payback pattern over the economic life of the project
3 It shows the profitability of an investment and helps to measure the current performance of the project