The Premise Of Payback Methods

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The premise of payback methods starts with how long it takes to recover the amount of money put into the project. It’s overall better for the payback period to be shorter in the long run. There is payback methods listed for four alternative projects related. For instance, in each project the initial outlay is $8,000. Therefore, by the end of 2015 projects one and two have recovered the initial $8,000 investment, (Finkler, S.A., Ward, D.M. & Calabrese, I.D., 2013). As a result, a payback period of 3 years is the amount of time. In 2016, is when the initial investment of projects three and four recover. Then, the other two projects are lower because of the payback period is 4 years. Issues can arise with the payback methods and if projects one …show more content…
For example, present value of $500 cash amount currently and figuring out how to accumulate if invested interest rate (i) of 10% for a period of time (N) of 2 years. Once calculating the compounded interest is calculated, and then multiply the interest rate by initial investment period. Next, the mathematical formula developed to solve some time value of money issues of FV= PV (1 + i) n which is built into computer spread sheets and business calculators. Other issues or to solve an answer that arises, the formulas can be used are FV= PMT [1 + i) n -1/ i] and the other formula of FV=PMT [1-1/(1 + i) n/ i]. Usually, identical payments are used with five variables of FV, PV, N, I, and PMT. Overall, time value of money methods presents a framework for solving numerous issues dealing with receipt or payment of cash in diverse time periods. Not only business calculators, but Microsoft excel helps with a great deal of time value of money calculations and using the correct formulas for problem …show more content…
In the internal rate of return method, the desire to find out whether it is earning more or less than a specified hurdle rate. As opposed to NPV method which rarely indicates the rate of return a project is earning. Gathering from these conclusions results as problems arise when comparing projects when all have positive NPV’s. Another contrasting point if internal rate of return from NPV is greater than zero, the earning is more than your rate of return. On the other hand, if the NPV is less than zero the rate of return is less than desired. By earning exactly as needed for the hurdle rate, the NPV would be zero as a result. If a company wants to find out their rate of return of the project earns, or internal rate of return, it’s important to find the interest rate to which the equation is true. This is a simple approach to finding the internal rate of return as Microsoft excel would compute the formula even when cash inflows from a project change each

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