Online Help, Guidance and Solutions for Virtual University of Pakistan Students
Total Marks5Starting DateWednesday, December 02, 2015Closing DateFriday, December 04, 2015StatusOpenQuestion TitleCapital Budgeting TechniquesQuestion Description
How to apply capital budgeting techniques to make decisions on capital investment?
Students would be able to apply payback technique of capital budgeting in a situation where it is highly required.
It is not conceptually preferable to use payback period as a tool to decide about the capital investments but still it is used by the mangers; why it is preferred to select a project when a better tool like NPV is available? And why it should not be considered?
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It relates to Lecture 08.
In Pay Back Period technique, we try to find the time period in which the amount we invested can be recovered. It is easy and simple method but does not takes into account time value of money and interest rates. In NPV, calculations involve too many estimates and it is a complex method. We have to forecast future cash flows and sales in this method also. Forecasting is not easy, it involves many factors like interest rate, discounting, future economic opportunities. So Pay back period is preferred as it is simple and easy.
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