Google Answers Logo
View Question
Q: weaknesses to the payback method? ( Answered 5 out of 5 stars,   0 Comments )
Subject: weaknesses to the payback method?
Category: Business and Money > Finance
Asked by: missmallprincess-ga
List Price: $3.00
Posted: 13 May 2004 10:59 PDT
Expires: 12 Jun 2004 10:59 PDT
Question ID: 345878
What are the weaknesses to the payback method compared with time value
of money financial tools?
Subject: Re: weaknesses to the payback method?
Answered By: omnivorous-ga on 13 May 2004 11:21 PDT
Rated:5 out of 5 stars
Missmallprincess --

The payback method compares projects by the amount of time that it
will take for income to offset expense.  The prime weakness is that it
doesn't take into account the time value of money.

Because it doesn't account for the time value of money, there are several problems:
?	it could lead to a negative real return
?	it could lead to choosing a project with a lower TOTAL return
?	it doesn't account for changes in inflation (i.e., cost of capital)

If you were to lend me $99 and choose one of two repayment plans in
today's American economy, which would you choose?  The payback method
says, choose #1:
1.	 $33 per year for 3 years (payback = 3 years)
2.	 $25 per year for 6 years (payback = 3.96 years)

The following article was done for an electrical project but explains
graphically why payback is rarely used:
"Financial Analysis of Cogeneration Projects" (Carlos, Mar. 23-25, 2004)

Google search strategy:
"definition of payback"
"payback vs. NPV"

Best regards,

missmallprincess-ga rated this answer:5 out of 5 stars

There are no comments at this time.

Important Disclaimer: Answers and comments provided on Google Answers are general information, and are not intended to substitute for informed professional medical, psychiatric, psychological, tax, legal, investment, accounting, or other professional advice. Google does not endorse, and expressly disclaims liability for any product, manufacturer, distributor, service or service provider mentioned or any opinion expressed in answers or comments. Please read carefully the Google Answers Terms of Service.

If you feel that you have found inappropriate content, please let us know by emailing us at with the question ID listed above. Thank you.
Search Google Answers for
Google Answers  

Google Home - Answers FAQ - Terms of Service - Privacy Policy