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explain the pros and cons of the payback period

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Kim, the chief financial officer of the company, has arranged a meeting with you and the head of manufacturing because she thinks you need to explain to him the time value of money. Kim is concerned that many of the manufacturing projects that have been pursued are based on the payback period and do not recognize that a dollar received 3 years from now is not the same as a dollar received today.

You decide to put an illustration together to review with Bob, the head of manufacturing, showing how much US$1 would decline at a 3% interest rate over a 5-year time period. You will describe the decline each year, starting with the current year. Since Bob is a strong believer in the payback period, you decide to also explain the pros and cons of the payback period.

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Hi there,

Here is how I would explain the concept of the time value of money to Kim, the CFO of the company:

Inflation doesn't sleep. That means the dollars you receive today will be worth less in the future. If those dollars are part of a structured payment, no matter what the source -- lottery prize, insurance settlement or trust -- inflation will make the value of today's payments shrink in the coming years. Yet in most cases, the structured payment will never increase to meet inflation.

Another example:

Suppose your brother or sister owed you $500. Would you rather have this money repaid to you right away, in one ...

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