4. Suppose one of Lone Star’s executives typically uses the payback as a primary capital budgeting
decision tool and wants some payback information.
a. What is the project’s payback period?
b. What is the rationale behind the use of payback as a project evaluation tool?
c. What deficiencies does payback have as a capital budgeting decision method?
d. Does payback provide any useful information regarding capital budgeting decisions?
e. Chicago Valve has a number of different types of products: Some that are relatively
expensive, some that are inexpensive, some that have very long lives, and some with
short lives. Strictly as a sales tool, without regard to the validity of the analysis, would
the payback be of more help to the sales staff for some types of equipment than for others?
Explain.
f. People occasionally use the payback’s reciprocal as an estimate of the project’s rate of
return. Would this procedure be more appropriate for projects with very long or short
lives? Explain.