Pay back Period

 What is the payback period? What are the advantages and limitations of using this method?

PP is the simplest method of looking at one or more investment projects or ideas. This method focuses on recovering the cost of investments.  PP represents the amount of time that it take

For a capital budgeting project to recover its initial cost.

            (cost of proj /Investment )

    PP =     -------------------------------

          Annual cash inflows

Eg:  proj cost $200,000, and returns of proj 40,000 annually.

PP here is   $200,000 /40,000 = 5 years.

 

Advantage: Easy to calculate

 

Problems:

1. It ignores benefits occur after Payback period, and so does not measure the total incomes
2. PP ignores the Time value of Money.