AIU The Payback Period Approach to Capital Budgeting Discussion

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Assignment Details

Capital budgeting techniques aid business with investment decision making. Many approaches can be used, with some being more advanced than others.

• Describe the payback period approach to capital budgeting.
• Explain 1 advantage and 1 disadvantage of the technique.
• Explain why it would be wise for a financial manager to learn advanced capital budgeting techniques.

In your replies to others, describe ways that payback approach can easily be used in business scenarios. 

Henrietta Henry

According to our lesson “LinkedIn Learning Path,” businesses use the payback method and it is because it is easy to apply as well as it makes available an initial screening of venture opportunities. This method can also be used to determine the risk of a project. This is a simple technique and to get to the payback period, the asset cost is divided by the total cash flows and it also determines how long it will take for an investment to equal the preliminary cash outlay. It is preferable when choosing from possible investments that the project has the shortest payback period. This is used when liquidity is an important standard when you choose a project since it focuses on the period that an asset can be reimbursed. One main advantage of using the payback method is its simplicity and how easy it is to apply as well as understand the process. It is also easy to calculate, and it does not need so much time and struggle when it comes to gathering and analyzing data that relates to the possible project. All you need to do is divide the cost by the cash inflows to arrive at the payback period and then compare the period of payback for each project. In the end, the project that has the shortest payback period will be selected. The biggest disadvantage of the payback period technique is that it does not consider the time value of money, which is the cash flow that the business receives in advance is more than what is received later. It is important to know that the cash that is received earlier is more valuable because it can earn more by reinvestment. It is important to know that the main duty of a financial manager is to exploit the capital of a company and its shareholders. Hence, it is the manager’s responsibility to make sure that the success of the business is to decide where to invest money in the long term. Hence, before a manager selects projects, there are lots of techniques that can be used, however, it depends on the resources and criteria of the company. Techniques that can be used to select a project are the payback period, accounting rate of return, net present worth, profitability guide, internal rate of return, modified internal rate of return, and discounted payback. The financial manager has the option to select a technique that will be most appropriate to the project, by considering all the factors needed and can increase the firm’s wealth. 

Xiomara DelVillar

Greetings class and Instructor Chris,

Below I will address this week’s discussion topics.

Describe the payback period approach to capital budgeting. Class, the payback period within capital budgeting relates to the time that is required for the ROI to repay the sum/amount of the original investment. Class, be advised the payback period is expressed within years. At the end of the day, how long does it take to pay to recover what you paid to do the loan or investment (recoupment period).

Explain 1 advantage and 1 disadvantage of the technique. Class, I feel that a benefit for this technique is that you will be able to accomplish your desired goals, seeing that you are willing to pay the fees needed to embrace the investment/action you are doing. I look at this like a refinance of something, by paying off what you owe due to the high interest rate you have and refinance what you owe into a new loan by obtaining a reduced interest, which is accompanied by paying fees to conduct that loan. The disadvantage is the ridiculous title loans or high interest loans people get because their credit and income worthiness is not where it needs to be and they take out these ridiculously high interest loans, which will most likely lead to a collection, because the loan term is so long and the loan payment is so high, you start to feel remorse and regret making these off the wall payment for such a long time, that you actually realize months in, that you have paid more than you borrowed and its not worth it.

Explain why it would be wise for a financial to learn advanced manager capital budgeting techniques. Class, capital budgeting is essential as this establishes accountability and measurability. Businesses that look to invest their resources for various projects without knowing or comprehending the risks associated and the potential returns involved would be viewed as irresponsible by the owners or stakeholders (Bradshaw, 2018). Understanding capital budgeting techniques is critical when investing or moving capital around. Understanding the risks and being able to potentially forecast probable outcomes is vital if you have sufficient data to support the transaction. (Pinkasovitch, 2023).

Class, I was thinking about my husband job (underwriter/appraiser) and I wanted to share an example that comes to mind. I always hear my husband discussing this while he works (at home) when he speaks with lenders regarding cash out refinance loans. There always must be a benefit to conduct the loan, and the recoupment period to recover the fees charged to do the loan, which is viewed as beneficial, seeing that the people do not go back out and charge up all the debt/credit cards they just paid off to get out of debt (if that makes sense).