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The AMA Handbook of Financial Risk Management by John J. HAMPTON

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Chapter11Capital Budgeting Returns

Once the cash flow stream for a capital budgeting proposal has been developed, we are ready to evaluate the likely return. In this chapter, we will compare three methods of measuring return: the payback method, the net present value method, and the internal rate of return method.

PAYBACK METHOD

The payback period is the length of time needed to regain the original cash outlay for an investment proposal. The calculations are in currency units and are not adjusted for the time value of money. The payback method seeks to determine the payback period for a capital investment. A quicker return of the original outlay not adjusted for the time value of money means that a project is more desirable than one with a longer ...

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