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.