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Investment decision based on minimum time required to recover initial cost is

Question

Investment decision based on minimum time required to recover initial cost is

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Solution

The investment decision based on the minimum time required to recover the initial cost is known as the Payback Period method.

Here are the steps to calculate it:

  1. Determine the initial investment cost. This is the total amount of money that was used to start the investment.

  2. Determine the annual cash inflow. This is the amount of money that the investment is expected to generate each year.

  3. Divide the initial investment cost by the annual cash inflow. The result is the payback period, which is the amount of time it will take to recover the initial investment cost.

For example, if the initial investment cost was 10,000andtheannualcashinflowis10,000 and the annual cash inflow is 2,000, the payback period would be 5 years (10,000/10,000 / 2,000 = 5).

This method is often used by investors who want to minimize risk and prioritize liquidity. However, it does not take into account the time value of money or cash flows that occur after the payback period.

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