From the course: Accounting Foundations: Managerial Accounting

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The payback method

The payback method

From the course: Accounting Foundations: Managerial Accounting

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The payback method

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- The four most commonly used capital budgeting techniques are the payback method, the unadjusted rate of return, the net present value method, and the internal rate of return method. This sequence parallels the pattern of most companies as they grow larger and become more sophisticated in the way they make investment decisions. That is, companies generally first use the payback method or the unadjusted rate of return method because these techniques are relatively simple. Both of these techniques have a serious weakness, however, in that they ignore the time value of money. As a result, most companies eventually turn to either the net present value method or the internal rate of return method, both of which are more theoretically correct approaches to capital budgeting. The last two techniques are referred to as discounted cash flow methods because they use a discount rate in comparing the cash flows of investments. The…

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