Payback period

• what does payback period mean/convey?

  used to show how long it will take for the expenditure on project to be recovered.

  • assesses risk aspect of project
  • Considers cash flow needs for firm
• Advantages?


  simple model to apply as simple, straightforward formula to apply

  Simple to understand -> results in years and months

  provides assessment of investment risk -> lower payback period = lower risk
• disadvatnages?

  • doesn't consider cashflows after payback period -> management only concerned with short term liquidity to determine length of time investment takes to repay initial cash outlay
  • doesn't consider time value of money. Model assumes cash value = constant throughout investment period
• disadvantages?


  • doesn't consider cashflows after payback period -> management only concerned with short term liquidity to determine length of time investment takes to repay initial cash outlay
  • doesn't consider time value of money. Model assumes cash value = constant throughout investment period
  • Doesn't consider rate of return