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Your email address will not be published.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

law of diminishing marginalexplain managerial grid in detailchronically unemployed definitioncharacteristic of perfect competitiondemand pull and cost push inflationexample for oligopolythe theory of consumer behavior assumes thatfrictional unemployment refers tovictor vroom motivation theoryadvantages of job evaluationquants definitionleveraged lease accounting examplecollective bargaining conceptcapital budgeting risk analysisdebenture holders definitiontypes of factoring in financedemocratic participative leadership stylethe definition of autocracyjoseph schumpeter theorymarginal costing in management accountingdefine laissez-fairejohair windowipo carve outmonopolistic competition wikipedia14 principles of henri fayolexplain marginal costingpurpose of ansoff matrixdefine situational variablesadvantages and disadvantages of human resourcespoaching meanspavlov theory dogemployees provident fund 1952employees provident fund rulesinnovation theory by joseph schumpeterexpentancy theoryrisk analysis in capital budgetingmeaning of hedge in hindiwhat does erg meandefine industrial relationsales and inventory system definitionclassical conditioning easy definitionexplain the concept of multiplierconsumer equilibrium with the help of indifference curveintrapreneur definitionnet profit margin ratiomeaning of moamanagerial grid of blake and moutonequity linked saving schemeimplications meaning in hindiuser status segmentation examplewhat is the definition of primalbases for segmenting business marketsoligopolistic market structurewhat is the meaning of coefficient in mathadvantages of sales forecastingfinance balloon paymentdefinition oligopolyfayol management principleswhat is profitability indexhindi meaning of retainedspearman's rank coefficientschumpeter innovation theoryweber on bureaucracydividend relevance theory pdfdefine apprenticeshiptotal enumeration sampling techniquewhat is job enrichmentneo classical organizational theoryresourcing definitiondefinition of geocentricmicro marketing definitiondefine referentverticle meaningimplicit cost and explicit costclassical conditioning theoristwhat is markup pricingcurrent asset turnover ratio formula