because the cutoff is too short. Also, just because one project has a shorter discounted payback than another does not mean it has a larger NPV.

All things considered, the discounted payback is a compromise between a regular payback and NPV that lacks the simplicity of the first and the conceptual rigor of the second. Nonetheless, if we need to assess the time it will take to recover the investment required by a project, then the discounted payback is better than the ordinary payback because it considers time value. In other words, the discounted payback recognizes that we could have invested the money elsewhere and earned a return on it. The ordinary payback does not take this into account. The advantages and disadvantages of the discounted payback rule are summarized in the following table.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

IV. Capital Budgeting

9. Net Present Value and Other Investment Criteria

© The McGraw-Hill Companies, 2002

CHAPTER 9 Net Present Value and Other Investment Criteria

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