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Which Of The Following Is A Capital Budgeting Method That Ignores The Time Value Of Money-

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One way corporate financial analysts do this is with the payback period..Shorter paybacks mean more attractive investments..It ignores the time value of money (TVM), unlike other methods of capital budgeting such as net present value (NPV), internal rate of return (IRR), and discounted cash flow..Others like to use it as an additional point of reference in a capital budgeting decision framework..Scores & Stats © Copyright 2018. All rights reserved.Our experts can answer your tough homework and study questions..

Others like to use it as an additional point of reference in a capital budgeting decision framework..The answer is found by dividing $200,000 by $100,000, which is two years.©copyright 2003-2020 Study.com. All other trademarks and copyrights are the property of their respective owners. All rights reserved..Conversely, the longer the payback, the less desirable it is.Some analysts favor the payback method for its simplicity.Capital budgeting considers the attractiveness of a fixed capital investment.The shorter the payback period the more attractive the investment is considered..

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Most capital budgeting formulas take the time value of money (TVM) into consideration.The second project will take less time to pay back and the company's earnings potential is greater.The NPV is the difference between the present value of cash coming in and the current value of cash going out over a period of time..Others like to use it as an additional point of reference in a capital budgeting decision framework..The concept of the payback period is generally used in financial and capital budgeting.

For example, if solar panels cost $5,000 to install and the savings are $100 each month, it would take 4.2 years to reach the payback period..This is the idea that money today is worth more than the same amount in the future due to the present money's earnings potential.The shorter the payback, the more desirable the investment.Therefore, if you pay an investor tomorrow, it must include an opportunity cost.One of the most important concepts every corporate financial analyst must learn is how to value different investments or operational projects.

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The calculation offsets the cash flow from future periods and when the investment reaches a breakeven point the payback period is considered satisfied.Sign up and access a network of thousands of Payback period experts..The calculation begins with the investment.Multiple methods are utilized to determine the best investment such as return on investment, payback period, and internal rate of return..The time value of money is a concept that assigns a value to this opportunity cost..But it has also been used to determine the cost savings of energy efficiency technology..

For example, if it takes five years to recover the cost of the investment, the payback period is five years.Clearly, the second project can make the company twice as much money, but how long will it take to pay the investment back?.The method does not consider the time value of money in the calculation.The payback period is the cost of the investment divided by the annual cash flow.It is determined by counting the number of years it takes to recover the funds invested.Which of the following is a capital budgeting method, that ignores the time value of money?.Which of the following is a capital budgeting method, that ignores the time value of money?.


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