Pay Back Period (PBP)

It measures the period of time required for the cost of a project to be recovered from the earnings of the project (annual cash flow). The main concern is the recovery of initial outlay.
Example:
       Original project cost               $500,000
       Earning per year                     $100,000
       Pay Back Period                      5 years
  • The shorter the pay back period, the better the project.
Advantages  of Pay Back Period (PBP)
  • It is easy to operate and simple to understand.
  • It considers  earnings from the project for the payback period. The uncertainty is reduced.
  • Loss through obsolescence is reduced. Short pay back period reduces risk.
  • It serves as a standard to compare profitability of alternative projects.
Disadvantages of Pay Back Period (PBP)
  • It does not consider cash flow after the pay back period.
  • Time value of money is not considered.
  • It ignores uneven profits from various projects.

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