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BRILLIANT’S Capital Budgeting 411

 20,00,000 
The pay back period in this case is 5 years  i.e. 
 4,00,000 
The project with the lower pay-back {Og àmoOoŠQ> H$m no-~¡H$ nr[a`S> H$_ hmoJm Cgo
period will be preferred. Sometimes the àmW{_H$Vm Xr OmEJrŸ& H$^r-H$^r _¡ZoO_|Q> nyd© _| hr {H$gr
management has a set idea regarding what
should be the maximum pay-back period. Thus àmoOoŠQ> H$m A{YH$V_ no-~¡H$ nr[a`S> {ZYm©[aV H$a boVo
management may, for example, decide that they h¢Ÿ& Cg Ad{Y go A{YH$ Ad{Y CXmhaU Ho$ {cE, 3 df©
will not accept any project if the pay-back dmbo àmoOoŠQ> ñdV… hr {ZañV _mZ {bE OmVo h¢Ÿ&
period is more than 3 years.

Acceptance Rule ñdrH¥${V H$m {Z`_
Pay-back period is used by many firms as Eogr H$B© H$ån{Z`m± h¢, Omo àmoOoŠQ> H$s a¢qH$J _| no-
an accept or reject criteria of ranking project. ~¡H$ nr[a`S> nÕ{V H$m Cn`moJ H$aVr h¢& `{X {H$gr àmoOoŠQ>
If the pay-back period calculated for a project H$m no-~¡H$ nr[a`S>, _¡ZoO_|Q> Ûmam {ZYm©[aV A{YH$V_ no-
is less than the maximum pay-back period set
~¡H$ nr[a`S> go H$_ h¡ Vmo Cgo ñdrH¥$V H$a {b`m Om`oJm
by management, it would be accepted; if not, AÝ`Wm AñdrH¥$V H$a {X`m OmEJmŸ& EH$ a¢qH$J _oWS> Ho$
it would be rejected. As a ranking method, it ê$n _| `h g~go H$_ no-~¡H$ nr[a`S> dmbo àmoOoŠQ> H$mo
gives highest rank to the project which has
hmBEñQ> a¢H$ XoVr h¡ Ed§ A{YH$ no-~¡H$ nr[a`S> dmco àmoOoŠQ>
shortest pay-back period and lowest ranking
to the project with highest pay-back period. H$mo g~go H$_ a¢H$ Xr OmVrŸh¡ & AV… `{X \$_© H$mo å`yMwAbr
EŠgŠby{gd àmoOoŠQ²>g _| go {H$gr EH$ àmoOoŠQ> H$m
Thus, if the firm has to choose among two
mutually exclusive projects, project with M`Z H$aZm h¡ Vmo g~go H$_ no-~¡H$ nr[a`S> dmbo àmoOoŠQ>
shorter pay-back period will be selected. H$m M`Z {H$`m OmEJm&
Merits JwU
1. This method of evaluating proposals for 1. H¡${nQ>b ~OqQ>J g§~§Yr àñVmdm| H$m _yë`m§H$Z H$aZo
capital budgeting is quite simple and easy Ho$ {bE `h EH$ gab _oWS> h¡ VWm Bgo g_PZm ^r
to understand. AmgmZ h¡Ÿ&
2. It is clear in this method that no profit is 2. O~ VH$ no-~¡H$ nr[a`S> nyam Zht hmo OmVm V~ VH$
earned from any project unless the pay- àmoOoŠQ> bm^ àXmZ Zht H$aVm, Eogm Bg _oWS> go
back period is over. kmV {H$`m Om gH$Vm h¡Ÿ&

3. This method is particularly suitable in case 3. `h _oWS> CZ CÚmoJmo§ Ho$ {bE {deof ê$n go Cn`moJr
of industries where the risks of obsoles- h¡, Ohm± AàMbZ H$s [añH$ A{YH$ h¡Ÿ& Eogo CÚmoJm| _|
cence are very high. In such industries, CÝht àmoOoŠQ²>g na \$m`ZoÝg {H$`m OmVm h¡ {OZH$m
only those projects which have a short pay
back period can be financed since the no-~¡H$ nr[a`S> H$_ h¡ Š`m|{H$ Q>oŠZmobm°Or _| n[adV©Z
changes in technology would make other hmoZo na H$m°ñQ> [aH$da hmoZo Ho$ nhbo hr àmoOoŠQ> Ho$
projects totally obsolete before their cost AàM{bV hmoZo H$m IVam ahVm h¡Ÿ&
are recovered.