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.