Phar 125: Pharmaceutical Accounting

Using the cash payback method will understate the attractiveness of a project with large salvage value as only the cost of capital investment and net annual cash flow are taken into account; ignoring the expected profitability of the project, cash flow occurring after the payback period, and time-value of money, which all largely contribute to the salvage value of the project.

The cash payback method would understate the attractiveness of a project with large salvage value since it only takes into account two factors - the investment and the annual net cash inflow. It simply informs managers how long before the invested money can be returned. The large salvage value becomes irrelevant since the nature of the method does not consider the income or profits that happen after the payback period.

The cash payback method understates the attractiveness of a project with a large salvage value because it only takes into account the net cash flows over a certain period of time, since that it has a limitation of ignoring the expected profitability of a project and ignores the cash flows occurring after a payback period. This will then understate the attractiveness of a project with large salvage value, since that it does not give a justified result due to its limitations.

Cash payback method of evaluating capital investment proposals may understate the attractiveness of a project with a large salvage value because it does not take into account the expected profitability of the project, cash flow occurring after the payback period as well as the time value of money. In computing for the cash payback period, it only takes into account the cost of capital investment and the net annual cash flow. Cash payback method is more suitable when the company is concerned about liquidity since it assumes that the revenue and expenses are in the form of cash.

Given the formula of the Cash payback method (cost of capital investment divided by net annual cash flow), it can be seen why the attractiveness of a project with a large salvage value with be understated. The formula itself is intended to determine the time it takes for a project to generate enough revenue to equal the amount of capital spent to acquire the project in the first place. However, from the numerator it only takes into the consideration the initial capital investment placed into the project and does not consider its salvage value. The salvage value can greatly affect the situation and time computed by the formula. The formula in its original state assumes that the amount should start at zero and that all projects have no salvage value. That is rarely the case in the real world. Instead, the formula should deduct the salvage value from the initial investment because it is certain that even after the useful life of a project there will still be a remaining value and therefore will only be using a certain portion of the initial value. This would in turn decrease the cash payback period to a more realistic prediction and increase the attractiveness of projects. This is a significant issue because in business decisions are not only made on a single project but are compared across multiple projects to select the most beneficial.

The cash payback method would understate the attractiveness of a project with a large salvage value because it does not take into account the expected profitability of the project. This method only considers the net cash inflows over the payback period and ignores cash flows after the payback period. Also, based on the formula, it does not take into consideration the time value of money which also influences the salvage value of a project.

Based on the formula, cash payback method do not consider the salvage value as part of the net annual cash flow. This method does not consider the value of cash flow after the payback method. Since this method do not give a justified, expected value of profitability, this understated the attractiveness of a project with large value.

Cash payback method understate the attractiveness of a project with a large salvage value because it only reflects the cost of capital investment and net annual cash flow. Cash payback method is useful in determining the time it will take to recover the initial investment and does not take into account the expected profitability of the project, cash flows beyond the payback period and time value of the money.

This is because in the cash payback method, only the cost of the capital investment is taken into consideration, while the salvage value at the end of the useful life of the investment is ignored. It does not take into account the possible value that can be taken back after the investment has lost its usefulness, which could be a benefit for approving the project.

The cash payback period can be calculated by dividing the cost of capital investment with the net annual cash flow.
Salvage value, on the other hand, is a value that can be obtained after the period of usefulness of, say, an asset like expensive equipment, after selling it out. It also helps decrease the depreciation expense a company would need to pay out throughout its useful life, which would further increase net income for them.
The reason why the cash payback method would understate the attractiveness of the project is because it does not account for the salvage value in its computation.

The cash payback method will understate the attractiveness of a project with a large salvage value since the method does not consider the salvage value in the computation (only the capital investment and net annual cash flow). The method only tells you about the payback period and not what happens after that.

The cashback method understates the attractiveness of a project with a large salvage value because the cashback method only takes into account the net cash inflows and not the value of the asset at the end of its useful life. The disadvantage of the cash payback method is that it ignores the time value of money, therefore a large salvage value is disadvantageous for a company because there is a risk of decreased profitability. Moreover, cashback method ignores the pattern of cash flow or the financial performance or profitability of a company beyond the payback period.

The cash payback method revolves around the question of how long it would take a project to recover its initial investment. Largely influenced by the element of time, the cash payback method recognizes that the sooner a project gets its benefits, the better the project. It completely disregards the years beyond the return of investment, which may possibly include a project's large salvage value.

The decision to invest in a project with a large salvage value life would be undermined if the cash payback method was used to facilitate that decision, such that the cash payback method, as stipulated in the formula, requires only the initial cost of investment and the net cash flow per year, which would then only give you the period of time at which the same cost of investment put into the project in the first place would be recovered, and no further information beyond that period. Given that this method only provides the company with such limit in foresight, it also does not reveal the potential profitability of the project as it looks past the time value of money for all cash flows that pertain to the initial investment, all of which are pertinent factors in determining the salvage value of the project.

The cashback method understates the attractiveness of a project with a large salvage value since as seen in the formula, the factors involved are only the cost of the capital investment and net annual cash flow. It doesn't take into account the profits after the payback period.

Cash payback method only takes into account the cost of investment and the annual net cash flow. It does not take into account the salvage value which is the value that is expected to be receive in exchange for selling the asset at the end of its useful life.

The cash payback method is fixated on the time between the date of an investment and the date in which the cost of the investment has been fully earned. It does not take into account the salvage value of projects, thus this factor is ignored. Without considering the large salvage value of projects, the longer it takes to earn back the initial investment. If the salvage value is added to the equation, the lifetime of investments may be significantly shorter than the expected timeframe that can be calculated by the cash payback method.