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Disadvantages of the Payback Method

The Payback Method calculates the number of years needed to recover cash investments from project cash inflows. It has disadvantages, including neglecting the time value of money and focusing on cash flow rather than rate of return. Additionally, it does not account for salvage value or encourage detailed cash flow projections.

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10 views5 pages

Disadvantages of the Payback Method

The Payback Method calculates the number of years needed to recover cash investments from project cash inflows. It has disadvantages, including neglecting the time value of money and focusing on cash flow rather than rate of return. Additionally, it does not account for salvage value or encourage detailed cash flow projections.

Uploaded by

ugalde.kirstenyvette
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

THE PAYBACK

METHOD
z
z
Payback Method

 The number of years required to recover the


cash investment made on a project. The
recovery of cash comes from the cash inflows
generated from the project.
z
Payback Method

Cost
Payback Period =
Annual Cash Inflows
z
Payback Method Disadvantages

 It does not consider the time value of money;


 The accept reject criterion is stated in terms of
years rather than at a discount rate;
 The firm’s attention is focused on cash flow
rather than on rate of return;
z
Payback Method Disadvantages

 Careful projection of the timing of the


investment outlays and the year-by-year
projection of cash inflows over the entire life of
the proposal are not encouraged; and
 The salvage value of the proposal is not
considered.

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