Advantages and disadvantages of pay back period, Financial Management

Advantages:

  • It is easy to calculate and catch.
  • With the help of this technique, projects can be ranked in terms of their economic merits without much of complication.
  • It indirectly considers factors such as obsolescence and liquidity of investments because project with shortest payback period is exposed to less risks.
  • This technique is useful to the company experiencing shortage of cash because it assists in choosing a project that will yield a quick return of cash fund regardless of its long-term profitability.

Disadvantages:

  • It does not measure the profitability of the projects.
  • It fails to consider any receipts after the payback period, no matter how great they might be. As a result, a project with shorter payback period may be selected against a project with a longer pay back period but longer income producing life and greater return on investment.
  • It ignores time value of money.
Posted Date: 10/15/2012 9:20:01 AM | Location : United States







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