Advantages And Disadvantages Of Payback Period Pdf

advantages and disadvantages of payback period pdf

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Business managers often face scenarios when they have to choose between projects. Such business decisions are very crucial as resources are limited.

Advantages And Disadvantages Of Payback Period

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.

Payback period advantages include the fact that it is very simple method to calculate the period required and because of its simplicity it does not involve much complexity and helps to analyze the reliability of project and disadvantages of payback period includes the fact that it completely ignores the time value of money, fails to depict the detailed picture and ignore other factors too. In many businesses, capital investments are obligatory. But, such investments do incur a lot of money outlays. And business homes certainly are going to be anxious to know when they will recover such an initial cost of an investment. You simply need the initial investment and the near term money flow information.

What is the payback period? Payback is perhaps the simplest method of investment appraisal. The payback period is the time it takes for a project to repay its initial investment. Payback is used measured in terms of years and months, though any period could be used depending on the life of the project e. Payback focuses on cash flows and looks at the cumulative cash flow of the investment up to the point at which the original investment has been recouped from the investment cash flows.

Advantage and disadvantages of the different capital budgeting techniques

As businesses grow and expand, managers are faced with a challenge of choosing a project that can warrant a further investment. Planning on how to allocate capital is a very important skill that managers should learn to avoid spending money on unyielding investments as this will be a wastage of capital. Payback period is a capital management concept which refers to a certain period of time which will be required for a project to generate revenue that will cover the initial revenues invested by the company during the start of that project. The choice between two or more investments regarding which one to go with is usually the one with the shortest payback period. This is determined by simply dividing the amount used to start the project and the amount that the project is generating per year.

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. This information is particularly important to a small business with limited resources that needs to quickly recover its costs to use for other expenditures.

Payback Period

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. The formula is to take the initial investment and divide by cash flow per year:. The sales manager has assured upper management that Blazing Hare sneakers are in high demand, and he will be able to sell all of the increased production.

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. You base your decision on how quickly an investment is going to pay itself back, and that is done through forecasted cash flow.

 Вы можете заметить, - продолжал Смит, - что взгляд его устремлен. Он ни разу не посмотрел по сторонам. - Это так важно? - полувопросительно произнес Джабба. - Очень важно, - сказал Смит.  - Если бы Танкадо подозревал некий подвох, он инстинктивно стал бы искать глазами убийцу.

Advantages And Disadvantages Of Payback Period

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5 COMMENTS

Audrey B.

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Ignores the time value of money: The most serious disadvantage of the payback method is that it does not consider the time value of money. Cash flows received during the early years of a project get a higher weight than cash flows received in later years.

Yesica A.

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Brunella C.

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Macra R.

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Advantages and Disadvantages of Payback Period · Simple to Use and Easy to Understand This is among the most significant advantages of the.

Jyoplotaduan

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1. It Is a Simple Process. One of the biggest advantages of using the payback period method is the simplicity of it. You base your decision on how.

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