Question

Why is the payback period method considered to be arbitrary? If you were the CEO, what payback period would you accept?

Answer 1

The pay back period is considered arbitrary because there is no pay back cut off date with which comparisons can be made. On the basis of the historical returns for risky projects and the treasury for the risk less project , we could calculate the cut -off payback period  on the basis of which an acceptable or unacceptable level pf payback could be calculated.

If i would be the CEO, then i would accept projects which have a low pay back period.

Pay back period is the time required for a project to recover the investments . The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions.