Free

Discounted Cash Flow and Payback - Research Paper Example

Add to wishlist

Summary

The paper "Discounted Cash Flow and Payback" presents that the payback period for Marine Limited’s capital expenditure is 2 years and 2 months. [Working: 5740 ÷ 32895 × 12 months]. The payback period for Dive Limited’s capital expenditure is 3 years and 8 months. [Working: 18630 ÷ 27240 × 12 months]…

Download full paper File format: .doc, available for editing

GRAB THE BEST PAPER97.4% of users find it useful

Read Text Preview

Subject: Business
Type: Research Paper
Level: Masters
Pages: 1 (250 words)
Downloads: 2
Author: fay56

Extract of sample "Discounted Cash Flow and Payback"

The ARR also favors Project 1, therefore the expected profitability of the project is higher than the profitability of Project 2.

TASK 2: UNDISCOUNTED CASH FLOW – PAYBACK PERIOD

YEARS

PROJECT 1

CASH INFLOW/ OUTFLOW

BALANCE

PROJECT 2

CASH INFLOW/ OUTFLOW

BALANCE

(90,000)

(90000)

20000

(70000)

10000

(80000)

80000

10000

40000

(40000)

45000

55000

40000

20000

The payback period for Project 1 is 1 year and 11 months. [Working: 70000 ÷ 80000 × 12 months].

The payback period for Project 2 is 2 years.

If the time value of money is ignored, Project 1 is again more profitable as it involves less risk as compared to the undertaken of Project 2 which has a higher payback period.

TASK 3: ADVANTAGES AND DISADVANTAGES:

DISCOUNTED CASH FLOW:

The method takes into account the time value of money.
It produces more meaningful results than the payback period.
It is more complicated than ARR and Payback and requires a number of calculations if solved manually.

PAYBACK:

It is simple to calculate.
The calculation of net cash flows is more objective than the calculation of profitability.
It indicates the project with the least risk.
It ignores the life expectancy of a project.
Two projects may have a similar payback period even though the pattern of cash inflows may be different.
It ignores the time value of money.

ACCOUNTING RATE OF RETURN

It is easy to calculate.
It can be used to compare the expected profitability of a project with the present profitability of the business.
It is based on average annual profit which may not be similar for each year.
The timing of cash flows is ignored.
It also ignores the time value of money.
There is no commonly accepted method of calculating capital employed.
It takes no account of the duration of the project.

CHECK THESE SAMPLES OF Discounted Cash Flow and Payback

Discounted and non-discounted cash flow techniques

This report aims at appraising four different projects on the basis of both discounted and non-discounted cash flow techniques.... This report aims at appraising four different projects on the basis of both discounted and non-discounted cash flow techniques.... Here the financial grounds are discussed such that financial grounds itself can be bifurcated on two basis which are discounted cash flow techniques and non-discounted cash flow techniques....

7 Pages (1750 words) Essay

The Importance of Working Capital Management, the Use of Discounted Pay Back

During the calculation of net present value, depreciation is not deducted because it is not cash outflow and that discounted cash flow provide for the return of investment automatically.... Payback period = investment required÷ Net annual cash flow.... payback refers to a period when the business is supposed to recoup its initial investment from the cash it generates.... The paper "The Importance of Working Capital Management, the Use of Discounted Pay Back" states that working capital refers to the total amount of money and assets that are easily converted to cash....

9 Pages (2250 words) Term Paper

Capital Budgeting. Payback Period. NPV

Memo to Assertive Al One of the main drawbacks of using the payback method is that it does not take time value of money into account.... It also ignores all the cash flows beyond the end of the payback period.... Discounted payback method can to some extent overcome the drawbacks of the payback method as it considers time value of money into account.... In a discounted payback period, the future expected cash flows are discounted by the project's cost of capital....

4 Pages (1000 words) Essay

The financial feasibility of a capital expenditure. Pevensey Plc

According to this method, the future expected cash flow, over the time span of the project, are discounted based on the expected discount rate in the economy.... The expected cash flow from each year is multiplied by the discount factor to arrive at the present value at year 0 i.... Moreover, IRR is also ineffective for investments proposals which are a mixture of positive and negative cash flow.... payback period is another method utilized in investment appraisal which calculates the time taken by the investment to generate enough cash inflows to recover the initial cost of the investment....

5 Pages (1250 words) Essay

CORPORATE FINANCE - MODULE 6 MINICASE

In the process, managers firstly estimate the cash flows, then they assess the risk associated with the cash flows, then they determine the cost of capital.... Finally, managers evaluate the cash flows, and then decide which projects to include in the capital budget. ... This means that it generates enough cash to recover the cost of investment and the return that the investors want.... ndependent projects are those whose cash flows are not affected by the acceptance of another project....

11 Pages (2750 words) Essay

Project appraisal through discounted and non-discounted cash flow techniques

The positive Net Present Value signifies that the project, asset, of any item being forecasted will generate positive cash inflows in future and project should be accepted an initiated if the decision only bases on financial grounds, the project will generate profits in the forthcoming periods if all other factors remained constant....

8 Pages (2000 words) Essay

Finance and Financial Management of Organization

Mentioned below table is showing the cash flow which would have been generated by Bodmin Plc by considering the above cost-benefit analysis.... Net Present Value analyzes the future cash flow at the present time.... IRR is a point where in the future cash flow of a project or a company becomes zero (Bryman A, Bell E, 2007).... The IRR of the company in undiscounted cash flow 27%, while in discounted it is 12% which is lower than the actual percentage of 14%, hence it should not be accepted....

5 Pages (1250 words) Assignment

Financial Management Measures - Discounted Payback Period

Discounted Payback period is the amount of time required to recover the initial outlay cost with the investments discounted cash flows.... This paper "Financial Management Measures - Discounted payback Period" focuses on the two shortlisted proposals for the Poladian PLC to improve the situation of the company due to the current global crisis.... Net Present Value is the difference between the present values of the cash inflows and outflows.... nternal Rate of Return is defined as the discount rate that causes the present values of all the future cash flows to become zero....

5 Pages (1250 words) Assignment