Payback period

• What is packback period?


  measures the return from investment in terms of a time period
• how to calculate payback period


  -identify the net cash flows for each period

  -then keep a running total of the cash flows

  -initial investment is nearly always an outflow

  -look when the running total move from negative to positive

  -when the total net cash flow becomes positive that is the end of the payback period
• benefits


  -simple and easy

  -focuses on cash flows

  -emphasises speed of return

  -straightforward to compare competing projects
• drawbacks 


  -ignores cash flows after payback has been reached

  -takes no account of the time value of money

  -may encourage short term thinking

  -ignored qualitative aspects of a decision

  -does not actually create a decision for the investment