pros and cons of using the payback method to evaluate investment

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Payback method

Payback period is a given period after the initial investment is recouped or recovered. The burning question in the payback method is how long does it take to get the initial cost back in a nominal way .The advantage of using this method to evaluate investment is that it is easy to understand and it is also biased towards liquidity’

While the limitations include; it doesn’t take into account the time value of money and it is not concerned with the cash flow once the initial investment has been recovered

Reference

Gitman, L., & Forrester, J. (n.d.). A Survey of Capital Budgeting Techniques Used by Major U.S. Firms. Financial Management, 66-66.




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