Introduction and the Payback Period Approach

Question 1

What is the payback period approach?

Answer 1

Number of years needed to recover the initial cash investment in a project. Have a pre-established maximum period.

if payback periods is less than the maximum- Accept!

Advantages: - Easy to use and understand, useful in understanding product liquidity, establishing a short maximum period it reduces uncertainty

Disadvantage- Ignores the time value of money, ignores cash flows after the payback period.