Question

Identify and explain any (3) advantages of using the Payback method.

Answer 1

1) Explain three advantages of Payback method.

i) Payback period calculation is a simple method of calclation in capital budgeting to compute the period recovered to recoup the investment amount. It doesnot involve complex calculation and hence, the calculation process is relatively quicker.

ii) Payback period computes the period within which the investment can be recouped. In other words, it measures the risk in the project's payback. It is also a tool to measure the liquidity risk in the project.

iii) Payback method can be used a tool to compare various project proposal present before the management. If other things are constant in a project, project with a lower the payback period is preferred over a project with a higher payback.