Disadvantages of payback period, Finance Basics

Disadvantages of Payback Period

1. Does not receive into account time value of money and supposes that a shilling obtained in the 1st year and in the Nth year have the similar value so like to rank them simultaneously to ascertain the PBP that is unrealistic given such a shilling now is valuable rather than a shilling N years from currently.

2. PBP procedure does not measure the profitability of a venture however quite measures the period of time a venture obtains to pay back the cost.  The procedure is outside looking or lender oriented quite than owner oriented.

3. PBP procedure ignores inflows after PBP and like, it does not accommodate the factor of return to an investment.

4. This procedure will not have any type of impact on the company's share prices as profitability that is one of the most significant factors in gauging the company's value of shares is not a function of PBP and like the procedure fall short of meeting the criteria of investment appraisal.

Posted Date: 1/31/2013 12:25:53 AM | Location : United States

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