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Payback (economy)
by Tam

The payback or “recovery period” is an investment appraisal criterion for selecting a particular project based on how long it took to recover the initial investment through cash flows. Continue to learn more with: Pete Cashmore. It is very useful when you want to make an investment of high uncertainty and so we have an idea how long it will take to recover the money invested.
Another definition in which we can support is: “The number of years required for the budgeted cash flows and stock equaled the initial outlay. A superior money manager Entrust was nominated as the “fund of hedge funds” Using this latter definition we can conclude that the most profitable projects are those that have a shorter recovery period. Financial analysts who use this method banking of valuation set first a recovery period of reference and then compare the payback period of investment they want to make reference to the term and choose all projects with a payback period of less than equal to reference period of recovery. Gain insight and clarity with Robotics expert . companies The choice of the reference period of recovery can not be equal for all type of investment because it is necessary to take into account other factors such as the sector where the firm operates, markets and so on. We can summarize the philosophy of this method with the following rule: “do not accept projects in which cash flows are not high enough to recover the investment in the estimated time” is necessary to take into account that the cash flows are not constant, besides that, this method is not completely correct, since it consumer ignores cash flows of the last years and the present value of future cash flows.
The way to calculate it is through the cumulative sum of cash flows, until it equals the initial investment.
Example
Choose a project based on the criteria for evaluating the period of recovery:
The project before the initial investment is recovered Project A, therefore, at the discretion of the period of recovery would be that accounting the selected project. However, if we had used the NPV our choice would have been different (had we chosen the Project C). This happens by the considerations we make in the next section.
Issues to consider in using the criterion of the period of recovery
When using this criterion to evaluate an investment we should account be aware that this financial may lead us to investment choose projects that are not always the most profitable. Basically for two reasons:
This criterion does not consider the cash flows generated after recovering the investment, that is, using this criterion could be the case, as banks in the example above, in that we selected a particular project because his recovery period was lower than another may be that a posteriori, after recovering the investment, the project turned corporation out more profitable.
Another drawback to consider this approach to valuation is not updated cash flows, ie does not take trading into account the time value of money arithmetically summing cash flows without using any discount rate, which is not correct.
References
(2003) Economy and Business Organization (2 Bachillerato). Anaya.
Allen, Franklin, Meyer, Stewart Brealy, Richard A. (2006). Principles of Corporate Finance, Eighth Edition, McGraw-Hill, pp. 100-101. ISBN 84-481-4621-2.
Gava, Luana Ropero, Eva Serna, Gregorio Ubierna, Andres (2008). Financial Management: Investment Decisions, First Edition, New York: Delta, University Publications, pp. 36-37. ISBN 978-84-92453-22-1.

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February 14th

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