ecisions are capital investment decisions designed to replace older assets with newer ones (DeBenedetti, n.d.).

Regardless of the type of capital investment decision facing managers, there are usually groups of individuals, or entire departments, which are interested in pursuing one particular project over another.  Project ranking is not uncommon in today’s business environment and is dependent on the fact as to how much the specific projects would return, as well as which project has the ability to provide the business the greatest value in the shortest amount of time.  The majority of capital investment decisions are reached with specified deadlines in mind which can result in more than one step in the decision-making process being ignored.  This, coupled with rivalry within departments, can bring about poor outcomes.

After management narrows down the list of potential projects, they must then start the process of using capital budgeting decision tools to reach their final decision.  Several tools can be used; however, the most common are the payback period, net present value method, and the internal rate of return method (Noreen, Brewer, & Garrison, 2014, p. 318).

Out of the three methods, the payback period is one of the most popular due to its basic and simple calculation, although it does not factor in the time value of money like some of the other methods.  The payback period in essence allows one to calculate how long it would take for a project to recapture the cost of the initial investment (Noreen, Brewer, & Garrison, 2014, p. 327).  The calculation is simple as it is the total cost of the project divided by the estimated cash inflows expected each year.  The end result is the number of years to recover the initial cost, or the payback period. As an example, my employer used this method as a guideline when deciding which research projects should/should not be undertaken.  Although the assumption is that most research projects will generate revenue for the organization, it isn’t known how long it will take before the healthcare organization recoups the investment they initially put into the project to get it off the ground. Based on the results of the payback method, leadership will decide whether or not to accept or reject the project if the payback period is too far out of their comfort zone.

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