Question

how does chick fil a use payback period methods

Answer 1

In the CAPITAL BUDGETING OF financial management there are various traditional and the modern methods used to evaluate the project of the company , whether it is feasible or not for the company to go with that projects or not is estimated through these methods.

Traditional methods are pay back period methods and the average rate of return methods whereas under the modern concepts it is net present value method (NPV), internal rate of return method (IRR), and the profitability index method used to evaluate the projects

Pay- Back period method

This method is used in capital budgeting where time plays an important role for the recovery of funds expanded in the investment , this method not considers the time value of money which shows that how long some project pay for the company.

If pay back period is less than that project is considered to be good project pay back period is a tool of analysis as it is easy to apply and easy to understand for the individual without any proper training.

As the pay back period is less and compare to other project which has more time to pay back the money , the finance manager choose that project for there company whose pay back period is less.

Example: assume project one has pay back period two year while second project have pay back period 1.5 year than project two is accepted by the manager as it recovery is fast.

But there are certain limitations of the pay back period is that it does not account for time value of money, risk, factor  financing and other important consideration like opportunity cost .

Advantage of pay back method:

-Longer pay back period clearly shows capital is tide up .

-Those project whose pay back period is less can enhance liquidity.

-Business forecast on the short term.

-It is reliable technique.

-Investment risk can be easily accessed .

-Calculation process is simple and faster.

Disadvantage of pay back method:

-It ignore the timing of cash inflow.

-It ignore the time value of money.

-It ignore the cash flow produced after the end of the pay back period.

-It influence for excessive investment in the short project.