Module 5 BHS427 Health Care Finance (AUG2014-1) Capital Budgeting Essay

faculty 5 BHS427 Health Care Finance (AUG2014-1) Capital Budgeting (CASE) - Essay Exampleis referred to as the time it takes a firm to recover its initial bills expenditure from the interchange inflow it gets from a certain sick or investment. Academics usually advocate the NPV method followed by IRR measure. The retribution tip method serves as a supplementary tool to decision making. The payback period is quite attractive, but its shortcomings make it less very much relevant. Its shortcomings include the lack of conside proportionalityn of the time value of money that trick influence wrong decision-making and, it in any case ignores any cash flows which accrue after the payback period. Despite its shortcomings, the payback period method is smooth used by firms in appraising capital budgeting decisions (Avery, 2011).The continual use of the payback period by firms and managers implies that there is value realized from its results. Thus, considering a constant emersion rat e of cash flows the payback period can be calculated by using two main factors of cash flow. The factors are the ratio (I) of the initial outlay to the next period projected cash flow, and the projected cash flow growth rate (g) (Avery, 2011., p.1). Therefore, if the payback period is negatively associated to g and positively related to the ratio I, the management is at a better position to evaluate the expenses and gains of a certain project. Money time value can be adjusted via the discounted cash flows.This approach suggests that there is an expected constant growth in cash flows choosing the value of g depends on existing knowledge of the activity and foresight of a firm. The ratio I will be the initial investment divided by 1. The cash flow is also fictitious to be growing at a constant rate of g percent per period. Thus from calculations the payback period (T) is directly proportional to I, and inversely proportional to g. That is a high value of I imply a high initial inves tment cost as compared to the projected first period cash flow. Hence, an investor will take a longer time to