Capital Investment Evaluation
Provide 1 response to each student post. Each response should be 150 words each. Turnitin is being used to check for plagiarism and Please use APA format.
Collapse Subdiscussion Brandy Havens Brandy Havens
XXXXXXXXXX:17am Apr 24 at 9:17am
Hi Marcus. You did very well exploring the net present value method! As we look at the different methods this week, it’s also worth exploring the risk and uncertainty of some of the factors that we incorporate when using each evaluation method. The uncertainties could influence our decision on whether or not to pursue the project.
Class, what would you perceive to be the most significant variables or uncertainties associated with each method? Which method do you think carries the most substantial uncertainties? Why?
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- Collapse Subdiscussion Anna Williams
Anna Williams
XXXXXXXXXXApr 17, 2019 Apr 17 at 11:53pm
Capital Investment Evaluation
Payback Period Method
In Chapter 10 of the text, Schneider XXXXXXXXXXdefines the Payback period method as a, “quick and dirty evaluation of capital investment projects” (p.422). To put simply, the payback period method describes the time it takes to get the kickback from the investment. An example could be investing money into your friend’s new vegan cupcake company. You’ve invested $5,000.00 to help them get started and they’ve promised to pay you back in full on your investment within one year. This illustrates the concept of the payback period method and the way that an investor has put a certain timeframe on getting the money that they put into that investment back. Now, if we are implementing the payback method here you’d be expecting to get that money back within 12 months.
The advantages in this method include the fact that investments that guarantee a payback in a short amount of time are clearly very attractive to those looking to investment. After all, if someone offered to pay what you’ve invested or double what you’ve invested in 3, 6 or 12 months, wouldn’t you consider it? I’m not really one for taking too many financial risk but I would definitely think about it. Other advantages include the fact that this method has been proven to be beneficial in capital and financial budgeting. Kim, Shim and Reinschmidt XXXXXXXXXXaffirm, “the PBP concept is intuitive; the required calculation is straightforward; and it is simple to understand and easy to communicate, even with decision makers who may lack sophisticated theoretical backgrounds in economic analysis or simply have no time to get into details” p. 114
There can also be some obvious drawbacks such as the uncertainty and risk involved with using this method. The simple payback method does not take the time-value of money into consideration either which has been deemed as the greatest flaw of this particular method.
References
Kim, B., Shim, E., & Reinschmidt, K XXXXXXXXXXProbability Distribution of the Project Payback Period Using the Equivalent Cash Flow Decomposition.Engineering Economist,58(2), 112–136. https://doi-org.proxy-library.ashford.edu/10.1080/0013791X XXXXXXXXXX
Schneider, A XXXXXXXXXXManagerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/