What are the advantages and disadvantages of using the payback period?
Payback has several advantages. First, it is simple to calculate. Second, it is easy to understand and explain. Third, it is a rough indicator of the level of risk in a project, because projects that payback sooner are often viewed as being more liquid and, therefore, less risky than those with longer payback periods. At the same time, payback has three distinct disadvantages. First, the choice of a maximum acceptable payback period is arbitrary. Second, it does not take into account the timing of cash flows. Third, it does not deal with any cash flows beyond the payback period.
