Advantages and Disadvantages of Payback Period

Payback period is a capital budgeting concept which refers to period of time which is required for a project to generate a return on investment which will cover the original investment made by a company on the initial project cost. So for example if the initial project cost is $50000 and annual cash flow from such project is $10000 then it implies that payback project would be 5 years.

The advantage of using payback period is that its ease of use and anybody who is having limited financial knowledge can apply it. It is also beneficial for those companies who are recently established and want to know the time frame in which they would recover their original investment, therefore those companies which do not want to take risk and want quick return on their investments can select those projects which have low payback period and ignore those projects which require long gestation projects.

While disadvantage of payback period is that ignores an important concept which is time value of money and therefore may not present true picture when it comes to evaluating cash flows of a project. It also ignores cash flows beyond the payback period and therefore it does not take into account the complete return which a project can generate and therefore it may reject a project which in the long term may be beneficial for a company.

5 comments… add one
  • love this site thanks a lot for your assistance,you made me pass my exams due to my researches made here. Your good materials which are relevant, once more thanks for your assistance.

  • MANU ERIC

    love this site thanks a lot for your assistance,you made me pass my exams due to my researches made here. Your good materials which are relevant, once more thanks for your assistance.
    Reply

  • Virginia vatileni

    i realy appreciate your help.keep it on,

  • OSWALD CHIPUKUNYA

    This site contains useful and relevant information.It has helped me with many assignments.

  • Jacob Belled Faranga

    I really appreciate those who are promoting and updating us on this page, thanks keep it up

Leave a Comment


Related pages


bank loan and bank overdraftexamples of period costsobjectives of demat accountsimilarities between public finance and private financehypothecation of goodsdifference between a qualified and unqualified audit reportdisadvantages of merger and acquisitionwhat are the disadvantages of globalizationadvantage and disadvantage of international tradedifference between accounts payable and accounts receivabledisadvantages globalizationprepaid accounting entrieswhat is clr in bankingadvantages of centrally planned economyadvantages of dematerialisationcharacteristics of a planned economyunearned rent revenue balance sheetpros of autocratic leadershipcharacteristics of autocratic leadershipbundling pricing strategyexamples monopolistic competition companiesmeaning of cost push inflationdifference between carriage and freightcarriage inwardurbanisation benefitsdifference between tariff and quotausefulness of the statement of cash flowsfullform of impsthe downside of globalizationmerits and demerits of debit carddifferentiate between trade discount and cash discountwhat is conglomerate in economicspros and cons of market segmentationjournal entry of outstanding expensesadvantages and disadvantages of traditional economylearn bank reconciliation statementmonopoly price makerdifference between direct cost and indirect cost with exampleffe reservedifference between retail banking and commercial bankingskimming pricing strategy advantages and disadvantagescash reserve ratio in indiaskimming pricing advantages and disadvantagesexamples of accrued incomeexchange rate quotationfull form nasdaqskim pricing strategyebit equationwhat does penetration pricing meandisadvantages of industries wikipediadeflation advantages and disadvantageswhat is the difference between durable and nondurable goodsproduct bundle pricing definitionexample of substitution effectexamples of perfect competition market structuredisadvantage of international tradeconglomerate merger meaningsocialism featureswhat are the advantages and disadvantages of market economycost push inflation is caused byauthorized shares vs issued sharesadvantages of debit cardsdescribe a traditional economysubstitution effect and income effect examplesexample of complement goodsjournal entry for closing stockcrossing chequeswhat is law of diminishing returns in economicssystematic vs unsystematic riskdirect and indirect quotationsexamples of revenue expenditure and capital expendituredisadvantages of bill of exchangewhat is the difference between complimentary and complementaryunearned revenue in balance sheetdifference between capital and drawingsautocratic advantagesdefine complementary goods