Question

Please explain how the Payback method can be a useful investment evaluation technique for management.

Answer 1

Payback period can be defined as the specific time period in which an investment is recovered. In other words it is the time period required to reach the break-even point. Usage of Payback period method may generate contrary decisions as compared to the other techniques which are based on time adjusted value but it is regarded as one of the simple and easy method/technique for evaluation of capital budgeting proposals. Despite the presence of various shortcomings, it may be useful and appropriate under many circumstances.
For examples;
• Organization present in the political unstable country will primarily look for the recovery of its initial investment at earliest and for the same payback period method will be appropriate.
• If the organization has limited funds and for them raising additional funds is not possible, they will be attracted towards those projects which will ensure easy and early recovery. Payback period is the best evaluation technique for this case.