Advantages And Disadvantages Of Payback Period Method Pdf

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Limitations of Using a Payback Period for Analysis

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. So, it is universally applied method of evaluating proposals.

Advantages and Disadvantages of Payback Period

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. In general, a lower payback period suggests lower risk.

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. However, there are advantages to using the payback period, which are as follows:. The concept is extremely simple to understand and calculate. When engaged in a rough analysis of a proposed project, the payback period can probably be calculated without even using a calculator or electronic spreadsheet.

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include the fact that it is very simple.

Payback Period Advantages and Disadvantages

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.

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.

Advantages & Disadvantages of Payback Capital Budgeting Method
1 Response
  1. Enhoomyro

    As businesses grow and expand, managers are faced with a challenge of choosing a project that can warrant a further investment.

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