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Classification of Investment Projects

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Classification of Investment Projects
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Size

Type of Benefit Expected

  • Cost Reduction
  • Expansion Project
  • New Product Introduction
  • Mandated Projects

By Degree of Dependence

  • Independent Projects
  • Mutually Exclusive Projects
  • Contingent Projects

Non discounted Cash Flow Criteria

Payback Period

  • The payback period is the number of years needed

to recover the initial cash outlay. This criterion

measures how quickly the project will return it's

original investment

  • The accept - reject criterion is whether or not the

project's payback period is less than or equal to

the firm' s maximum desired payback period.

Example:

Year                        After-Tax Cash Flow

  1                                   $2,000

  2                                   $4,000

  3                                   $3,000

  4                                   $3,000

  5                                   $1,000

  • If the initial cash outlay was $10,000, and the firm's

maximum desired payback period is 3 years. The

payback period for this project will be 3.3333 years,

and the firm will reject the project as 3.333333 is

greater than 3 it's maximum acceptable payback

period.

  • The Payback Period does not take into account the time

value of money

  • The Payback Period ignores any cash-flows that occur

after the payback period