Payback period = Expected number of years required to recover a project’s cost.
PaybackL = 2 + $30/$80 years
= 2.4 years.
Payback period = 1.6 years.
Advantages of payback period.
1. Quick and simple
2. Easy to understand
3. Good for short period small projects
Weaknesses of Payback:
1. Ignores the time value of money. This weakness is eliminated with the discounted payback method.
2. Ignores cash flows occurring after the payback period.
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