Question

Explain the payback period rule in capital budgeting. Explain pros and cons of the payback period...

  1. Explain the payback period rule in capital budgeting.

  1. Explain pros and cons of the payback period as a project selection criteria.

  1. Explain the meaning of Internal Rate of Return (IRR) on an investment project.

  1. Explain why investors should diversify their investments.

  1. Explain the systematic risk.
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Answer #1

Payback period is the period in which the amount which is to be used as cost of a project is recovered through cash inflows by the same project. Shorter payback periods are always preferred.

Benefits of Payback period is that it is used for decision making related to capital budgeting whereas this will not be incorporating the discounting rate of return so this will not be reflective of the time value of the money.

Internal rate of return is a rate at which the value of cash outflows will be equal to the value of cash inflows of a project.

Investors should diversify their investment because they should be cutting on to unystematic risk related to the portfolio.it will help in maximizing the rate of return of portfolio.

systematic risk is market risk which is not controllable by the company and it is related to macro factors like inflation and interest rate.

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