A Business Encyclopedia

Payback Period

Definition: The Payback Period helps to determine the length of time required to recover the initial cash outlay in the project. Simply, it is the method used to calculate the time required to earn back the cost incurred in the investments through the successive cash inflows.

The formula to calculate it:

Payback Period = Initial Outlay/Cash Inflows

Accept-Reject Criteria: The projects with the lesser payback are preferred.

Merits of Payback Period

  1. It is very simple to calculate and easy to understand.
  2. This method is helpful to analyze risk, i.e. to determine how long the investments will be at risk.
  3. It is beneficial for the industries where the investments become obsolete very quickly.
  4. It measures the liquidity of the projects.

Demerits of Payback Period

  1. The major drawback of this method is that it ignores the Time Value of Money.
  2. It does not take into consideration the cash flows that occur after the payback period.
  3. It does not show the liquidity position of the company, but only tells the ability of a project to return the initial outlay.
  4. It does not measure the profitability of the entire project since it only focuses on the time required to recover the initial investment cost.
  5. This method does not consider the life-span of investment, what if the life of an asset gets over very much before the initial investment cost is realized.

Thus, the payback period is the simplest method to assess the risk associated with the investment and the time required to get the initial outlay recovered.

Leave a Reply

Your email address will not be published. Required fields are marked *


Related pages

laissez leadershipmeaning of channel partnerkisan vikas patra for nrifayol 14 principles of managementwhat is the purpose of hrmexamples of participative managementretained profit definitionretained profits definitioncapital budgeting process definitiondefine shrmprofitibility indexmm dividend theoryexamples of seasonal unemploymentthe purpose of hrminternational marketing definition kotlerhenri fayol organizational theorydefine maslow theorythe principles of scientific management summarymarket structure in managerial economicsdefine chronicallyintranet meaning in hindiauthocratic leadershipinternal and external factors affecting marketing environmentmonopoly in economics definitiongdp gnp national incomemonopolistic market definitionmeaning of semi variable costporters five force modelcrr in bankingethnocentrism definehrm training methodsquality circles in managementdelegations meaningmeaning of heterogeneity in hindilottery method of samplingmeaning of buyoutwhat is the meaning of coefficient in mathpsychoanalytic theory definitionerg theory examplesansoff product market matrixhindi meaning of retaineddisadvantages of linear programmingexample of super egodefinition of pert and cpmlocational break even analysisverbal communication wikipediadefine credit rationingreference groups consumer behaviourwhat is delegated powers meandefine retrenchedwhat is motivation hygiene theoryutility theory of consumer behaviordefinition of debentureswhat does legitimate power meanblake & mouton's managerial gridliquidity facility definitionmarginal and total utilitykeynesian business cycle theoryhrm defdefine contingency theory of leadershipleadership style autocraticdeterminants of consumer buying behaviourexplain the expectancy theory of motivationpoters five forceswhat is monopolistic competition marketsubstitutability economics definitionduality theory linear programmingjoharry windowmicroenvironment and macro environment in marketing7cs of communication examplesdefine retained profitdeontology in business ethicspolycentric cultureexchange rate defdefine financial forecastingschumpeter economistwhat is a convertible debenturecurrency exchange arbitrageexamples of teleological ethicslazy faire definitiondefine loan repayment