A project with short payback period can improve the liquidity position of the business quickly. In this case, project B has the shortest payback period. Advantages of Payback Method. The main advantages of payback period are as follows: A longer payback period indicates capital is tied up. 4 Advantages and Disadvantages of Discounted Payback Period Definition of Discounted Payback Period Discounted payback period is a capital budgeting method used to calculate the time period a project will take to break even and recover the initial investments. But like any other method, the disadvantages of payback period prevent managers from basing their decision solely on this method. Ignores cash flows beyond the payback period 3. Accept/ Rejects Criteria: The Project which has a lesser payback period will be accepted.

The payback period for the project A is four years, while for project B is three years. Simple to compute 2. Provides a crude measure of liquidity 1. As businesses grow and expand, managers are faced with a challenge of choosing a project that can warrant a further investment. The paper also included the examination of the Sep 20, 2017 Sep 20, 2017 by Editor in Chief. Ignores the time value of money 4. The payback period method for choosing among alternative projects is very popular among corporate managers and according to Quirin even among Soviet planners who call it as the recoupment period method. 3 Advantages and Disadvantages of Payback Period Method. The payback period is an evaluation method used to determine the time required for the cash flows from a project to pay back the initial investment. Advantages of Payback Method. In U.S.A. and U.K, this method is widely adopted to discuss the profitability of foreign investment. Payback Period Advantages Disadvantages 1. Purpose – To investigate the importance of using payback method in making capital budget decisions in relation to other appraisal techniques used for capital budgeting decision in organizations. Some advantages and disadvantages of payback method are given below: Advantages: An investment project with a short payback period promises the quick inflow of cash. Provides some information on the risk of the investment 3. No concrete decision criteria to indicate whether an investment increases the firm's value 2.
For example, if a $100,000 investment is needed and there is an expectation of the project generating positive cash flows of $25,000 per year thereafter, the payback period is considered to be four years. It is therefore, a useful capital budgeting method for cash poor firms. The formula of Payback Period are : Payback period = Initial Outlay / Net Cash inflows.

Advantages of payback period make it a popular choice among the managers.

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