Advantages of payback period

Advantages of payback period

Advantages of payback period may be explained in terms of easy calculation, easy understanding, risky project, and cash flows;

1             .    Easy to calculate

Payback period can easily be calculated by the accountant. Payback period does not involve complex calculation. Payback period even does not require accounting knowledge and skill and can be calculated by a lay man.

2            .    Easy to Understand

Payback period concept is easy to understand. This concept is very straightforward i.e. period in which total investment would be recover. This concept does not require any special knowledge or technical background for understanding.

3            .    Useful in Risky project

Payback period concept is more useful in risk project and an important tool for investment decision making. In risky project, investor is more interested to recover its investment as soon as possible.

4            .    Cash flow

Payback period is based on cash flow, which is more appropriate measure than profitability. Payback period explains the liquidity position to organization. it is importance to remember that liquidity position has fundamental importance for organization operations.