Investment Decision Rules - Alternative Decision Rules - The Payback Rule
3 important questions on Investment Decision Rules - Alternative Decision Rules - The Payback Rule
What does the payback rule essentially states?
That only projects paying back their initial investment within a certain period should be undertaken
How does the payback rule work? (1 step, 2 outcomes)
Calculate the payback period. Accept if shorter than predefined period, reject when longer.
For what three reasons is the payback rule less reliable than the NPV decision rule?
1) It ignores time value of money
2) It ignores cash flows after the payback period
3) It lacks a decision criterion grounded in economics (that is, what is the right length of a payback period?)
2) It ignores cash flows after the payback period
3) It lacks a decision criterion grounded in economics (that is, what is the right length of a payback period?)
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