Understanding Non-Discounted Payback and Accounting Rate of Return Models

The video tutorial explains the payback period, which is the time it takes to recover the capital invested in a project. It covers both discounted and undiscounted payback models, emphasizing the importance of discounting future cash flows due to inflation and opportunity costs. The tutorial also introduces the accounting rate of return, calculated by dividing average net profit by average investment, and highlights its use in evaluating potential projects.

What does the payback period measure in investment analysis?

• The average annual return on investment

• The total profit from an investment

• The time taken to recover the initial investment

• The future value of cash flows

Why is it important to discount future cash flows in the payback model?

• To ensure a higher rate of return

• To account for inflation and opportunity costs

• To simplify the calculation process

• To increase the future value of money

What is the primary use of a non-discounted payback model?

• To calculate the exact return on investment

• To perform a quick evaluation of investment recovery

• To determine the future value of cash flows

• To assess the risk associated with an investment

How is the average investment calculated in the accounting rate of return?

• By averaging the beginning and ending investment values

• By multiplying the initial investment by the rate of return

• By subtracting the ending investment from the beginning investment

• By dividing the total investment by the number of years

What does the accounting rate of return indicate?

• The future value of the investment

• The time taken to recover the initial investment

• The average annual profit as a percentage of the investment

• The total cash flow over the investment period