Advantages And Disadvantages Of Payback Period Method Pdf

File Name: advantages and disadvantages of payback period method .zip
Size: 20573Kb
Published: 22.05.2021

Payback period advantages include the fact that it is very simple method to calculate the period required and because of its simplicity it does not involve much complexity and helps to analyze the reliability of project and disadvantages of payback period includes the fact that it completely ignores the time value of money, fails to depict the detailed picture and ignore other factors too.

Business managers often face scenarios when they have to choose between projects. Such business decisions are very crucial as resources are limited. Thus, managers need to choose the best project that could maximize their return on the investment. One capital management or capital budgeting method that managers often refer to when facing such dilemmas is the Payback Method. There are various advantages and disadvantages of payback period which we will discuss and critically evaluate the technique.

Advantages and Disadvantages of Payback Period

When it comes to running a business and maximizing the finances, there are many routes that one can take for budgeting. As there are always finite and limited budgets and resources, managers must make tough decisions on what investments are going to be worth it, and how long it will take. It Is a Simple Process. One of the biggest advantages of using the payback period method is the simplicity of it. You base your decision on how quickly an investment is going to pay itself back, and that is done through forecasted cash flow. If you have three different projects that will cost you the exact same amount, the decision can be as easy as the project that will return the initial investment the fastest.

As businesses grow and expand, managers are faced with a challenge of choosing a project that can warrant a further investment. Planning on how to allocate capital is a very important skill that managers should learn to avoid spending money on unyielding investments as this will be a wastage of capital. Payback period is a capital management concept which refers to a certain period of time which will be required for a project to generate revenue that will cover the initial revenues invested by the company during the start of that project. The choice between two or more investments regarding which one to go with is usually the one with the shortest payback period. This is determined by simply dividing the amount used to start the project and the amount that the project is generating per year. A project with shorter payback period implies higher returns.

The payback method is one of several you can use to decide on these investments. Although the method can add benefit to your analysis, its drawbacks might prevent you from using it as a sole decision factor. The payback method requires fewer inputs and is typically easier to calculate than other capital budgeting methods. Other methods use these same inputs, but require additional assumptions that are more difficult to estimate, such as the cost of capital. Your small business can use the payback method as a preliminary screening tool and avoid further analysis on investments that do not meet your payback criteria.

3 Advantages and Disadvantages of Payback Period Method

Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance.


include the fact that it is very simple.


Advantages And Disadvantages Of Payback Period

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. The advantages of the payback period are that it is especially useful for a business that tends to make relatively small investments, and so does not need to engage in more complex calculations that take other factors into account, such as discount rates and the impact on throughput. The usual complaints about the payback period focus on how it ignores subsequent investments and does not account for the time value of money.

Post a Comment. Know The Benefits And Drawbacks. Main benefits or advantages of payback period method of evaluating investment proposal are as follows:. Payback period method is very simple to understand. It does not require specific knowledge and accounting rules to apply.

Advantages & Disadvantages of Payback Capital Budgeting Method

Limitations of Using a Payback Period for Analysis

The payback method of evaluating capital expenditure projects is very popular because it's easy to calculate and understand. It has severe limitations, however, and ignores many important factors that should be considered when evaluating the economic feasibility of projects. The object of the payback method is to determine the number of years that it takes to recover the initial investment. The formula is to take the initial investment and divide by cash flow per year:. The sales manager has assured upper management that Blazing Hare sneakers are in high demand, and he will be able to sell all of the increased production. The most significant advantage of the payback method is its simplicity.

ГЛАВА 73 У Дэвида Беккера было такое ощущение, будто его лицо обдали скипидаром и подожгли. Он катался по полу и сквозь мутную пелену в глазах видел девушку, бегущую к вращающейся двери. Она бежала короткими испуганными прыжками, волоча по кафельному полу туристскую сумку. Беккер хотел подняться на ноги, но у него не было на это сил.

Example of the Payback Method

Это странное имя, по-видимому, не вызвало у женщины каких-либо ассоциаций. Она извинилась, предположила, что Беккер перепутал агентство, и, наконец, положила трубку. Первая попытка закончилась неудачей. Нахмурившись, Беккер набрал второй номер. И на другом конце сразу же сняли трубку.

ЦИФРОВАЯ КРЕПОСТЬ ПОЧТИ ГОТОВА. ОНА ОТБРОСИТ АНБ НАЗАД НА ДЕСЯТИЛЕТИЯ. Сьюзан как во сне читала и перечитывала эти строки. Затем дрожащими руками открыла следующее сообщение. ТО: NDAKOTAARA.

3 Advantages and Disadvantages of Payback Period Method

Она была слишком возбуждена, чтобы ответить. Испания. Так вот почему Дэвид отложил поездку в Стоун-Мэнор.