**The period of time required to recover the net investment is called payback period, P _{B}.**

**The project which pays back the initial investment in the smallest period is acceptable under this method.**

**Decision: **

** If (calculated P _{B} < standard P_{B}) => Accept the project**

** If (calculated P _{B} > standard P_{B}) => Reject the project**

**Merits of payback period:**

ü **Easy to understand and inexpensive to use.**

ü **Easy and crude way to analyze the risk.**

ü **Uses all cash flow information.**

ü **Considers liquidity.**

**Demerits:**

û **Ignores the time value of money.**

û **Ignores cash flow occurring after payback period.**

û **Not objective way to determine the standard payback period.**

û **Not a measure of profitability.**

û **Payback period ignores the wealth maximization.**

**Types of Payback period:**

**1.****Simple payback period****2.****Discounted payback period**

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