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Define the payback method and discuss the advantages and disadvantages? Calculate the payback period using the...

Define the payback method and discuss the advantages and disadvantages? Calculate the payback period using the following information

Year Annual 0 ($100) 1 10
2 60

3 80

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Answer #1

The Payback Period is a technique to analyze the capital budgeting decision making. It calculates the time required to recover the funds invested at the initial stage of the projects which is also known as the initial outlay cost/ Initial Investments, it can also be known as the break-even point.

Advantage:-

1. Simple Technique to use

2. A simple measure of risk; the more time it takes to i.e the longer it takes to pay back, the higher is risk in the project.

Disadvantage:-

1. Its does not consider the time value of money.

2. It does not take into account the cash flow after the payback period.

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