Multi-period investment

(noun)

An investment that takes place over more than one periods.

Related Terms

Examples of Multi-period investment in the following topics:

  • Multi-Period Investment

    • Multi-period investments require an understanding of compound interest, incorporating the time value of money over time.
    • With single period investments, the concept of time value of money is relatively straightforward.
    • With these variables, a single period investment could be calculated as follows:
    • With multi-periods in mind, interest begins to compound.
    • All and all, the difference from a time value of money perspective between single and multiple period investments is relatively straightforward.

  • Multi-Period Investment

    • Multi-period investments take place over more than one period (usually multiple years).
    • There are two primary ways of determining how much an investment will be worth in the future if the time frame is more than one period.
    • That means you earn another $5 in the second year, and will earn $5 for every year of the investment.
    • Simple interest is when interest is only paid on the amount you originally invested (the principal).
    • Calculate the future value of a multi-period investment with simple and complex interest rates

  • Single-Period Investment

    • What is the value of a single-period, $100 investment at a 5% interest rate?
    • If you plan on leaving the money there for one year, you're making a single-period investment.
    • Any investment for more than one year is called a multi-period investment.
    • Let's go through an example of a single-period investment.
    • Since this is a single-period investment, t (or n) is 1.

  • Annuities

    • An annuity is a type of investment in which regular payments are made over the course of multiple periods.
    • An annuity is a type of multi-period investment where there is a certain principal deposited and then regular payments made over the course of the investment.
    • Since annuities, by definition, extend over multiple periods, there are different types of annuities based on when in the period the payments are made.
    • Annuity-due: Payments are made at the beginning of the period .
    • Ordinary Annuity: Payments are made at the end of the period .

  • Advantages of the Payback Method

    • Payback period as a tool of analysis is easy to apply and easy to understand, yet effective in measuring investment risk.
    • Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment.
    • As a stand-alone tool to compare an investment to "doing nothing," payback period has no explicit criteria for decision-making (except, perhaps, that the payback period should be less than infinity).
    • The payback period is an effective measure of investment risk.
    • Payback period method is suitable for projects of small investments.

  • Elements of the Income Statement

    • The income statement reflects a company's performance over a period of time.
    • The income statement can be prepared in one of two methods: single or multi-step.
    • The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line.
    • The final step is to deduct taxes, which finally produces the net income for the period measured.
    • This could include items such as restructurings, discontinued operations, and disposals of investments or of property, plant and equipment.

  • Defining the Payback Method

    • A $1000 investment which returned $500 per year would have a two year payback period.
    • In capital budgeting, the payback period refers to the period of time required for the return on an investment to "repay" the sum of the original investment.
    • As a stand-alone tool to compare an investment, the payback method has no explicit criteria for decision-making except, perhaps, that the payback period should be less than infinity.
    • An implicit assumption in the use of the payback method is that returns to the investment continue after the payback period.
    • The payback period is usually expressed in years.

  • Calculating the Payback Period

    • To calculate a more exact payback period: Payback Period = Amount to be initially invested / Estimated Annual Net Cash Inflow.
    • Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment.
    • Payback period is usually expressed in years.
    • Payback Period = Amount to be initially invested / Estimated Annual Net Cash Inflow.
    • The modified payback period algorithm may be applied then.

  • Disadvantages of the Payback Method

    • Payback period analysis ignores the time value of money and the value of cash flows in future periods.
    • An implicit assumption in the use of payback period is that returns to the investment continue after the payback period.
    • Payback period does not specify any required comparison to other investments or even to not making an investment.
    • The modified payback period algorithm may be applied then.
    • Then the cumulative positive cash flows are determined for each period.

  • Ranking Investment Proposals

    • Several methods are commonly used to rank investment proposals, including NPV, IRR, PI, payback period, and ARR.
    • The higher the NPV, the more attractive the investment proposal.
    • Payback period intuitively measures how long something takes to "pay for itself. " All else being equal, shorter payback periods are preferable to longer payback periods.
    • Payback period is widely used because of its ease of use despite the recognized limitations: The time value of money is not taken into account.
    • When comparing investments, the higher the ARR, the more attractive the investment.