Ignores the time value of money 4. Advantages of Payback Method. In U.S.A. and U.K, this method is widely adopted to discuss the profitability of foreign investment. The payback period for the project A is four years, while for project B is three years. The formula of Payback Period are : Payback period = Initial Outlay / Net Cash inflows. But like any other method, the disadvantages of payback period prevent managers from basing their decision solely on this method.
A project with short payback period can improve the liquidity position of the business quickly. In this case, project B has the shortest payback period. Advantages of Payback Method. The paper also included the examination of the
Advantages of payback period make it a popular choice among the managers. 3 Advantages and Disadvantages of Payback Period Method. The payback period method for choosing among alternative projects is very popular among corporate managers and according to Quirin even among Soviet planners who call it as the recoupment period method. Simple to compute 2. Provides some information on the risk of the investment 3. Some advantages and disadvantages of payback method are given below: Advantages: An investment project with a short payback period promises the quick inflow of cash. Payback Period Advantages Disadvantages 1. For example, if a $100,000 investment is needed and there is an expectation of the project generating positive cash flows of $25,000 per year thereafter, the payback period is considered to be four years. As businesses grow and expand, managers are faced with a challenge of choosing a project that can warrant a further investment. Sep 20, 2017 Sep 20, 2017 by Editor in Chief. Ignores cash flows beyond the payback period 3. The main advantages of payback period are as follows: A longer payback period indicates capital is tied up. No concrete decision criteria to indicate whether an investment increases the firm's value 2. It is therefore, a useful capital budgeting method for cash poor firms. Purpose – To investigate the importance of using payback method in making capital budget decisions in relation to other appraisal techniques used for capital budgeting decision in organizations. 4 Advantages and Disadvantages of Discounted Payback Period Definition of Discounted Payback Period Discounted payback period is a capital budgeting method used to calculate the time period a project will take to break even and recover the initial investments. Provides a crude measure of liquidity 1. The payback period is an evaluation method used to determine the time required for the cash flows from a project to pay back the initial investment. Accept/ Rejects Criteria: The Project which has a lesser payback period will be accepted.
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