Hello everyone.
One of the largest financial criteria used to assess the appropriateness of carrying out an investment project is the Pay-Back . Basically, the Pay-Back measured the time in which recovers the initial investment accounting is disbursed to undertake a project. In any case, it is clear that the data obtained is not the creation of value provided by a project but is rather a true indicator of the risk associated to it by that, far from being a tool to be used as a criterion single is rather associated with related metrics NPV (net present value).
If, for example, paid € 5,000 to undertake an investment project that the first year we returned € 1,000, the second and the third € 2,000 € 2,000 more, the pay-back of investment is three years. As is readily apparent, the main advantage of this "method" is simplicity while main drawbacks is the fact that they ignore cash flows that occur after the recovery of the property value accounting and does not consider the opportunity cost of money or its value over time.
A Pay-back "improved" Pay-back is granted, including the opportunity cost of money and the costs associated with cash flow because it measures no longer accounting period of good recovery but period in which the project has positive NPV. Thus we can compare two cases in which the recovery time affects the calculation ...
If, for example, paid € 5,000 to undertake an investment project that the first year we returned € 1,000, the second and the third € 2,000 € 2,000 more, the pay-back of investment is three years. As is readily apparent, the main advantage of this "method" is simplicity while main drawbacks is the fact that they ignore cash flows that occur after the recovery of the property value accounting and does not consider the opportunity cost of money or its value over time.
A Pay-back "improved" Pay-back is granted, including the opportunity cost of money and the costs associated with cash flow because it measures no longer accounting period of good recovery but period in which the project has positive NPV. Thus we can compare two cases in which the recovery time affects the calculation ...
... making it clear that the sooner recover money ... better.
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