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ACC501 Business Finance GDB 1 Solution Spring 2014

Discussion Question:
Payback period is an important capital budgeting technique. We can define payback period as “length of time taken to recover initial investment of a project”. Despite of having many disadvantages, many multinational (Big) organizations use this technique for decision making purpose. You, as a student of business finance, are required to discuss the reasons for which the said organizations use nthis technique
Solution:
Qualities of payback period rule:
•Simple and easy to calculate, useful for large number of small investment decisions by corporation
•Its biasness towards short term projects, emphasizes on liquidity, i.e. quickly freeing up cash for other uses
•It adjusts for more uncertain cash flows expected in later part of a project’s life.

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