Student must respond to at least two peers in at least 250 words and at least two scholarly sources. The two peers names and view on subject will be listed below along with needed information to respond.
Pierson, Rachel, posted 07/18/2018 04:48:50 PM , updated 07/18/2018 04:48:51 PM
The cash payback method is a simple way to express return of investment for capital investments (Edwards, Tsay, and Olds, 2011). The payback method has been a stable tool used by companies during the decision-making process (Couch, 2016). From a high level, it takes the original investment amount and then you divide by the cost savings to determine the timeframe for return of investment (Edmonds, et al., 2011). It is simply expressed as; payback period = net cost of investment / annual cost savings (Edmonds, et al., 2011). An example would be the purchase of a new laser cutter. The new piece of equipment cost five hundred thousand dollars ($500,000). Due to its high cutting efficiency, the new equipment, will save on labor cost by eliminating the need for one (1) person per shift. The company operates five (5) days per week on three (3) shifts, and they pay their machine operators ten dollars ($10) per hour. Based on this info, the payback method formula would look like this: Payback Period = $500,000 / $62,400 ($10 * 40 hours per week * 52 week * 3 people) = 8.01 years.
Although the payback method provides a good snapshot of the return of investment, it does not show the whole picture (Levy, 1968). Let’s say we are looking at two (2) comparable vendors for the laser cutter. Maybe one company offers a one-year warranty, and the other offers a five-year warranty at no extra cost. There are additional cost savings by choosing the five-year warrantied machine. Or maybe the life expectancy for one machine is better than the other. Another potential objection would be that the labor savings would not be consistent throughout the duration of the year (Edmonds, et al., 2011). They are projected cost savings, and thy may greatly differ from the actual cost savings would extend the maturity date of the investment (Edmonds, et al., 2011). As with anything, you have to understand the pros and the cons in order to determine which process would work best.
Pelkey, Domini, posted 07/18/2018 06:16:55 PM , updated 07/18/2018 06:21:03 PM
Routinely, organizational leaders must make decisions that impact a business’s long-term success and ability to be profitable (Putnam, n.d.). Decisions that impact an organization’s long-term success and profitability include those that involve capital investments (Putnam, n.d.). Capital investments are defined as major financial purchases that are incurred by an organization (Putnam, n.d.). Overall, capital enables an organization with the ability to operate and meet the demand of its customers (Putnam, n.d.).
Unfortunately, capital investments also pose a significant risk factor for an organization (Putnam, n.d.). In addition, capital investments are categorized as sunk costs that cannot be reversed or easily overcome (Putnam, n.d.). Ultimately, an organization may never recoup or recover from the financial impact that accompanies a capital purchase (Putnam, n.d.).
Therefore, organizations will review capital investment proposals by using various techniques (Edmonds, T. P., Tsay, B., & Olds, 2011). These techniques or methods can be classified according to their inclusion or exclusion of the time value of money (Edmonds, et al., 2011). In other words, techniques may consider the depreciation of a dollar over time or they ignore the concept (Edmonds, et al., 2011). The techniques that incorporate the time value of money, such as the net present value method, are viewed as containing a higher degree of accuracy (Edmonds, et al., 2011). However, methods that include the time value of money require additional effort, time, and information (Edmonds, et al., 2011).
On the contrary, techniques that exclude the time value of money concept are known to provide a quick and easy path for organizations to review capital investment proposals (Edmonds, et al., 2011). Of these methods, the payback method is a popular choice despite its documented flaws (Chen, S., & Clark, 1994). Sadly, although it’s easy to use, the payback method casts aside the time value of money concept and overlooks the dollar value over time (Edmonds, et al., 2011). In addition, the payback method is limited because it only aids in forecasting the amount of time needed to recoup from the investment, versus potential profits (Edmonds, et al., 2011). Overall, the method produces analytics that may cloud an organizations decisions to support long-term profitability and success (Edmonds, et al., 2011).