Case Study:
According to Avery, Flaherty, and Rhee (2011), when choosing a capital budgeting decision tool, academics recommend net present value (NPV) as the primary tool followed by the internal rate of return (IRR) measure. The payback period method is also presented but is treated as a decision aid. As a decision tool, the payback period measure is typically regarded as intuitively appealing but with little practical relevance due to its shortcomings. In order to further evaluate the usefulness of the payback period, please read the following article: Fortifying the payback period method for alternative cash flow patterns by Avery, Flaherty, adn Rhee.
After reading the article and using other resources, please respond to the following questions.
1. Identify and discuss the payback period.
2. If the payback period method is inferior relative to present value techniques, why are firms still using it as a primary decision tool?
3. Summarize what the authors discussed about payback period with constant growth and without discounting.
4. Summarize the author's discussion on payback period with discounting.
5. Based upon what you have read in this article, do you agree with the statement that payback period has little practical relevance? Why or why not?
Your answer must be typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format.