Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Question
Chapter 12, Problem 9P
a.
Summary Introduction
To calculate: The selection of the investment using the PBP method.
Introduction:
Pay-back period (PBP):
It is one of the methods of capital budgeting that helps evaluate the time period in which the amount of initial investment is recovered. The formula for the calculation of the PBP is shown below.
Here,
Year = The year in which the cumulative cash flow is close to and less than the initial investment.
Initial investment = The amount of the investment.
Cumulative cash flow = The cumulative cash flow is close to and less than the initial investment.
Cash flow = The cash flow of the next year from the “Year� used for the calculation.
b.
Summary Introduction
To explain: The reason why the answer of part (a) is misleading.
Introduction:
Pay-back period (PBP):
It is one of the methods of capital budgeting that helps evaluate the time period in which the amount of initial investment is recovered. The formula for the calculation of the PBP is shown below.
Here,
Year = The year in which the cumulative cash flow is close to and less than the initial investment.
Initial investment = The amount of the investment.
Cumulative cash flow = The cumulative cash flow is close to and less than the initial investment.
Cash flow = The cash flow of the next year from the “Year� used for the calculation.
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Students have asked these similar questions
Devril plc is considering the investment in a project that has an initial cash outlay followed
by a series of net cash inflows. The business applied the NPV and IRR methods to evaluate
the proposal but, after the evaluation had been undertaken, it was found that the correct
cost of capital figure was lower than that used in the evaluation.
What will be the effect of correcting for this error on the NPV and IRR figures?
O a. NPV Increase IRR No Change
O b. NPV Decrease IRR No change
O c. NPV Decrease IRR Decrease
O d. NPV Increase IRR Increase
e. NPV Increase IRR Decrease
Apo
9. The Short-Line Railroad is considering a $100,000 investment in either of two
companies. The cash flows are as follows:
Year
Electric Co.
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1
$70,000
$15,000
2
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15,000
3
15,000
70,000
.........
4-10
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10,000
Using the payback method, what will the decision be?
Explain why the answer in part a can be misleading.
а.
b.
Chapter 12 Solutions
Foundations of Financial Management
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