Advantages and Disadvantages of Payback Period Method.
In two different paragraph give your personal opinion to Mary Harris and Destiny Wheeler
A healthcare organization thinking about making a capital investment is a big decision. There are various ways and methods they should go about when selecting metrics for evaluating this capital project. Relying on a combination of metrics allows for a better evaluation. The different metrics that should be utilized are net present value, internal rate of return, and payback period. The net present value considers the time value of money, as long as the projects are generating cash flow (Woodruff, 2019). The investor’s requires rate of return is used to calculate the present value of future cash flow. The internal rate of return utilizes a discounted rate that makes the present value of future cash flows equal zero (Woodruff, 2019). This method is beneficial because it compares the attractiveness of several projects. The payback period is the easiest to calculate. This method is a calculation of how long it takes to get an original investment back (Woodruff, 2019). Relying on a combination of metics has its pros and cons. It is beneficial because capital budgeting can be very complex. Only using one metric will not give the detailed information that an organization wants. Using multiple metrics also allows users to vary the tool when they have large, strategic projects (DeloitteCFOEditor, 2013). On the other hand, utilizing multiple metics can cause some issues. One issue being that each metric is different, meaning there might be a lot of time taken up. The net present value does not necessarily help with the issue of prioritizing many projects (DeloitteCFOEditor, 2013).
DeloitteCFOEditor. (2013, January). Capital Expenditure Planning: Using Metrics to Monitor Effectiveness. Retrieved December 11, 2019, from https://deloitte.wsj.com/cfo/2013/01/29/capital-expenditure-planning-using-metrics-to-monitor-effectiveness/
Woodruff, J. (2019, March). Three Primary Methods Used to Make Capital Budgeting Decisions. Retrieved December 11, 2019, from https://smallbusiness.chron.com/three-primary-methods-used-make-capital-budgeting-decisions-11570.html
A. During my research, I came across this article entitled, “De Blasio Announces $52 Million in Planned Captial Investment for NYC Health and Hospitals/Metropolitan, (2018). If anyone cares to read this article in its entirety, click on firstname.lastname@example.org.
According to Bill de Blasio (this is the last year article) (2018), A $52 million in Capital Investment Projects will be conducted over time with some scheduled for completion in the spring of 2021, to improve NYC Health and Hospitals/Metropolitan’s Infrastructure. I presented this because this could very well still be in the planning stage.
B. Which metrics to use for an organization depends on the strategy (Deloitte, 2013)they have in place and the results they want to accomplish, the nature of the project, what answers they are seeking and does the organization has the skills when it comes to “Financial Analysis”. It is not one size fit all approach, therefore multiples metrics need to used to reach the organization’s objectives.
C. Multiples Metrics must be used to evaluate a Capital Investment Project. With so many moving parts and the complexity of it all, it is nearly impossible for one metric to do the job. The budget alone is complexed enough, we really have not begun to factor in the project itself. The risk that is involved, you need a metric for that. What I am saying for every moving part of the astronomical project, there is a metric for it, or should be.
D. There are always pros and cons to all of the metrics (only a few is listed) that the organization will use to monitor/evaluate the project. We can look at;
- Hurdle Rate: Pros -Objectivity in preventing management from accepting a project because of a non-financial (CFI, n.d.) factors. Con: This metric is not always straightforward as in picking the investment with the highest return.
- Payback Period: Pros – Shortest approach to calculating Capital Expenditures. Con: this metric ignores the time value of money it emphasizes liquidity rather than (Connectus, n.d.) profitability.
- Net Present Value (NPV): Pros – This metric is very good in letting management know whether the value of all cash flows a project generates will exceed the cost of starting that particular project. It gives a positive or negative outlook. Con: Difficult (EFinance Management, n.d.) in determining the Rate of Return.
De Blasio Announces $52 Million in Planned Capital Investment for NYC Health and Hospitals/Metropolitan (2018). Retrieved from email@example.com
Hurdle Rate Definition. Retrieved from https://corporatefinanceinstitute.com
3 Advantages and Disadvantages of Payback Period Method. Retrieved from https://connectusfund.org
Advantages and Disadvantages of NPV. Retrieved from https://efinancemanagement.com
Choosing Capex metrics (2013). Retrieved from https://deloittle.wsj.com