Question

When might a CFO use Payback in deciding whether or not to undertake a project?

Answer 1

Payback period method is one of the methods used while making investment decisions Under payback method, the investor tries to find out that in how much time, the amount invested can be regained back. It ignores the time value of money concept. The formulae of payback period is as follows:

Payback period = Initial Cash Flow / CFAT or Cash Flow After Tax

A CFO can use this method for ascertaining the feasibility of the project. It counts the number of years that will be required for recovering the funds invested. Payback method is not an adequate method to judge the profitability of the project, however, this method can be used to estimate the time that project will going to take in order to pay back the funds that are invested. It is a mere indicator of the project's feasibility in terms of time, the profitability and other aspects can be checked by various other methods like NPV, IRR etc.