Limitations of Payback Period

Limitations of Payback Period

Limitations of payback period may be explained in terms of limited cash flow, ignorance of profitability and limited scope.

1.    Limited Cash flows

Payback period takes into account only limited cash flows i.e. cash flow up to the period of recovery and ignores the remaining cash flows. Therefore payback period has a limited scope.

2.    Profitability Ignore

Payback period does not take into account profitability of project. It focuses more in liquidity and risk, and does not any information about the profitability of the project.

3.    Limited Information

Payback period provide limited information about investment i.e. period of recovery. And therefore this tool cannot be used for investment decision making alone, rather it is used to support the investment decision made on the bases of other techniques.