The Payback Period as a Tool in Capital Budgeting Decisions Essay

The Payback Period as a Tool in Capital Budgeting Decisions - Essay Example In order to aid managers in making decisions with regards to capital budgeting, tools and techniques have been devised. One of these methods is called the payback method. The payback method is one of the most popular tools in conducting capital budgeting decision. The payback period tells the company the length of time required to recoup the original investment through investment cash flows. This is essentially the time when the company breaks even-the initial capital outlay is equal to the cash flows. For example, if a company invests $100,000 for the introduction of a new product line, then, the payback period reveals when the company will be generating cash flow of $100,000. Considering that the business organization invests in a project which generates the same level of cash flow annually, the payback period is computed as the follows: However, if the investment generates unequal annual cash flows, then the individual annual cash flows are subtracted from the initial investment until a difference of zero is reached. The year when cash flow equals investment is the payback period. Other things being equal, the investment with a low payback period is chosen as it implies less risk for the company. ... As the investment is recouped in a shorter period of time, it also indicates that the investment is less likely to fail. In the payback method, the profitability of the investment is often tied on how fast the investment generates cash inflow for the business organization. If the business organization is eyeing two or more projects to invest into, using the payback as sole decision criterion will make the company choose the project which has the lowest payback. However, if there is only one project to be evaluated, the firm often sets a specific span of time when the initial investment should be recouped. Generally, managers favor projects which have a payback period of less than three years. If the payback period is one year, the project is considered essential. In order to assess really understand how the payback period can be used in decision making, we will use it to evaluate two projects-one which has a fixed annual cash flow and one which generates unequal stream of cash flow. Suppose, XYZ Company is choosing between replacing its old machine used for production or embarking on a new product line. Each of the projects is estimated to require an initial investment of $100,000. Since the company is constrained with only $100,000 budget, the company must pursue only the more profitable option. The primary decision criterion used to evaluate investment decisions is the payback method. The estimated net cash flows are as follows: Year Replace Old Machine Introduce Product Line 1 $25,000 $10,000 2 $25,000 $20,000 3 $25,000 $70,000 4 $25,000 $50,000 5 $25,000 $50,000 A. Constant Annual Cash Flow The replacement of the old machine with the new one is forecasted to yield

Tuskegee Syphilis Experiments Essay Example | Topics and Well Written Essays - 750 words

Tuskegee Syphilis Experiments - Essay Example This led to demand of a change on the system to come up with protective rights for the participants. The research participants have a right to be respected despite the type of research being conducted. Research always seeks to learn new things about human conditions and the participants that are involved should not be treated as objects of study but as human beings. If research is being conducted on inanimate objects then there are no moral questions raised but as long as human beings are involved then they must be respected. Individuals should participate in research only if the questions being addressed are important and the risks involved are justifiable. The participant should be informed and participation should be voluntary (Brody, 2007). In addition, the participants have a protection right to having independent review on the risks and benefits of being involved in the study. The investigator needs to ensure that the participants have reviewed the risks and benefits involved and they have seen that they are reasonable. A set structure has the responsibility of conducting the reviews. This opportunity ensures that a participant sees the risks in relation to the potential benefits and volunteers to continue with the research. The risks and benefits should be examined carefully to avoid overlooking the benefits over the risks involved. The participants also have right to privacy during the study. It is a participants right to have privacy interests in relation to personal information, their body, and the space they occupy. Different medical studies affect the domains of privacy through different ways depending on the objectives and methods. The participants have the right to control information related to themselves. Privacy should always be respected and information on the participants should not be disclosed. It is the ethical duty of the investigators or researchers safeguard