Sarah Asif

190704
BSAvM-7-A
Assignment # 03

Payback period:

The time it takes to recoup the cost of an investment is referred to as the payback period. It is
simply the amount of time it takes an investment to break even.

The payback period is crucial since people and businesses invest money primarily to be
reimbursed. In general, an investment is more appealing the faster its payoff is. Everyone may
benefit from knowing the payback period, which can be calculated by dividing the initial
investment by the typical cash flows.

The formula for payback period is:

Payback period=cost of investment\average annual cost.

Discounted payback:

A capital budgeting technique used to assess a project's profitability is the discounted payback
period. By discounting future cash flows and taking into account the time value of money, a
discounted payback period calculates how many years it will take to recover the initial
investment. The metric is employed to assess a project's viability and profitability.

Because it assumes only one upfront investment and ignores the time value of money, the more
straightforward payback period formula, which merely divides the project's total cash outlay by
its average annual cash flows, doesn't provide a reliable answer to the question of whether or not
to undertake a project.

Payback period vs discounted payback period:

The payback period is the amount of time for the project to break even the cash while the
discounted payback is the amount of that is necessary to break the even in the point.

Net present value:

According to Knight, "Net present value is the present value of the cash flows at the project's
needed rate of return relative to your initial investment. It's a way to determine your return on
investment, or ROI, for a project or expense, in more concrete terms. You can determine whether
the project is worthwhile by taking a look at all of the money you anticipate making from the
investment and converting those returns into today's currency.

Internal rate of return:

It is the rate that is used to evaluate potential investment. In financial analysis, the internal rate of
return (IRR) is a statistic used to calculate the profitability of possible investments. IRR is a
discount rate that, in a discounted cash flow analysis, reduces all cash flows' net present values
(NPV) to zero.

Profitability index:

The profitability index (PI), also known as the value investment ratio (VIR) or profit investment
ratio (PIR), is an index that shows how the benefits and costs of a proposed project are related. It
is estimated as the difference between the project's initial investment and the present value of
predicted future cash flows.