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ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal

Which feature distinguishes the discounted payback method from the simple payback method of investment appraisal?

Discounted payback discounts each year's cash flows at the cost of capital and then finds when cumulative present values recover the outlay. This allows for the time value of money. Like simple payback, it still ignores cash flows after the payback point and gives a time, not a return.

  1. AIt takes account of cash flows arising after the payback period
  2. BIt converts project cash flows to present values using the cost of capital before finding the payback timeCorrect
  3. CIt expresses the result as a percentage return on capital employed
  4. DIt shows the absolute increase in shareholder wealth from the project

Explanation

Discounted payback discounts each year's cash flow at the cost of capital and then finds when the cumulative present value equals the initial outlay. It still ignores cash flows after the payback point, so the first option is wrong. It gives a time, not a percentage return or a wealth figure.

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