Feb 18, 2019 · Furthermore, the

**payback**analysis fails to consider inflows of cash that occur beyond the**payback****period**, thus failing to compare the overall profitability of one project as compared to another.The

**Problems**with**Payback****Period**, Part 1. If you’ve ever participated on a project team considering the purchase of a major piece of equipment, you’ve almost certainly heard of “**Payback****Period**” – the length of time projected to recoup an initial investment through cost savings, increase profits, etc.- Ray Harkins

**Payback****Period**= $100,000 / $20,000 = 5 years. In an actual scenario, a**payback****period**model can become a bit complicated with the addition of on-going costs like periodic maintenance, changes in work-in-process inventory, utility costs, etc. But once all the inputs are organized into a model, the**payback****period**calculation itself is ...The

**problems****with the payback****period**method as a means of analyzing and comparing potential investments extend beyond its**problem**with the time value of money. In fact, that**problem**can be corrected (but rarely is in practice) by using a method called the “Discounted**Payback****Period**”, where the future expected cash flows are “discounted ...- Ray Harkins

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**payback****period**(which tells the number of years needed to recover the amount of cash that was initially invested) has two limitations or drawbacks: The net incremental cash flows are usually not adjusted for the time value of money. This means that a net incremental cash inflow of $50,000 in ...Sep 20, 2017 · For instance, if the initial capital used to start the project was $60000 and the revenue that the project is bringing in each year is $20000 then that means that the

**payback****period**of that project would be 3 years. The choice between two or more investments regarding which one to go with is usually the one with the shortest**payback****period**.May 22, 2020 · The

**payback****period**for the project A is four years, while for project B is three years. In this case, project B has the shortest**payback****period**. Advantages of**payback****period**make it a popular choice among the managers. But like any other method, the disadvantages of**payback****period**prevent managers from basing their decision solely on this method.**Payback****Period**Is Not Realistic as the Only Measurement. There is some usefulness to this method, especially in quick-moving industries with a lot of rapid change. The**problem**for most businesses is that they need to have a better balance of projects and investments so that their short, mid, and long-term needs are all taken care of.- Formula
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**The**formula to calculate**the payback period**of an investment depends on whether**the**periodic cash inflows from**the**project**are**even or uneven.If**the**cash inflows**are**even (such as for investments in annuities),**the**formula to calculate**payback period**is:When cash inflows**are**uneven, we need to calculate**the**cumulative net cash flow for each**period**and then use**the**following formula:Where,A is**the**last**period**number**with**a negative cumulative cash flow;B is**the**absolute value (i.e. value witho...Company C is planning to undertake a project requiring initial investment of $105 million.

**The**project is expected to generate $25 million per year in net cash flows for 7 years. Calculate**the payback period**of**the**project.**The**longer**the payback period**of a project,**the**higher**the**risk. Between mutually exclusive projects having similar return,**the**decision should be to invest in**the**project having**the**shortest**payback period**.When deciding whether to invest in a project or when comparing projects having different returns, a decision based on**payback period**is relatively complex.**The**decision whether to accept or reject a project based on its**payback period**depends upon**the**risk appetite of**the**management.Manage...Advantages of

**payback period are**: 1.**Payback period**is very simple to calculate. 2. It can be a measure of risk inherent in a project. Since cash flows that occur later in a project's life**are**considered more uncertain,**payback period**provides an indication of how certain**the**project cash inflows**are**. 3. For companies facing liquidity**problems**, it provides a good ranking of projects that would return money early.Disadvantages of**payback period are**: 1.**Payback period**does not take into account...