Payback Period Flashcards
1
Q
Definition
A
The period of time it takes for the initial cost of investment to be repaid from net cash inflows
2
Q
Payback period formula
A
Amount required/cash inflow for the year x total
Months/weeks/days in a year
3
Q
Benefits of payback
A
- easy to calculate
- easy to understand
- places emphasis on earlier cash flows
- ideal capital investment for tech projects
4
Q
Limitations of payback
A
- all cash flows after the payback are ignored
- fails you consider the timing of net cash flows
- effects of inflation are ignored
- time value of money is ignored
- the life of the asset is not considered
- the estimates of cash flows may be inaccurate
