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BRILLIANT’S Analysis of Risk and Uncertainty in Investment Decisions 459

Conventional Techniques of Risk [añH$ Ho$ _yë`m§H$Z H$s H$Ýd|eZb Q>opŠZŠg
Evaluation
A number of techniques are used by _¡ZoOg© Ûmam [añH$ H$m gm_Zm H$aZo H$s {d{^ÝZ
managers to handle risk. Some of them are Q>opŠZŠg Cn`moJ _| bm`r OmVr h¢Ÿ& CZ_| go Hw$N> Q>opŠZŠg
conventional and commonly used methods. naånamJV Ed§ gm_mÝ`V… Cn`moJ _| bm`r OmZo dmbr h¢,
They are as follows: Omo Bg àH$ma h¢…
1. Pay-Back Period (PBP) 1. no-~¡H$ nr[a`S> (PBP)
Payback period is one of the most com- no-~¡H$ nr[a`S> {H$gr BÝdoñQ>_oÝQ> àmoOoŠQ> go Ow‹S>r
monly used methods for evaluating risk asso- hþB© [añH$ H$m _yë`m§H$Z H$aZo H$s g~go àM{bV _oWS²>g _|
ciated with an investment project. Payback go EH$ h¡Ÿ& no-~¡H$ nr[a`S> H$mo {H$gr àmoOoŠQ> _| bJZo dmbo
period may be defined as the number of years àma§{^H$ H¡$e-AmCQ>âbmo H$mo [aH$da H$aZo hoVw Amdí`H$
required to recover the initial cash outflows in
a project. If the project generates constant an- dfm] H$s g§»`m Ho$ ê$n _| n[a^m{fV {H$`m Om gH$Vm h¡Ÿ&
nual cash inflows, the payback period can be `{X àmoOoŠQ> go {_bZo dmbm dm{f©H$ H¡$e-BZâbmo pñWa h¡
computed by dividing cash outflow by the an- Vmo H¡$e AmCQ>âbmo H$mo dm{f©H$ H¡$e-BZâbmo go {d^m{OV
nual cash inflow. Thus, NPP H$aHo$ no-~¡H$ nr[a`S> H$s JUZm H$s Om gH$Vr h¡Ÿ& AV…,

Initial Investment I
PayBack Period =  0
Annual Cash inflow C
While calculating cash inflow, depreciation H¡$e-BZâbmo H$s JUZm Ho$ {bE àm°{\$Q> AmâQ>a-
is added back to the profit after tax as it does Q>¡Šg _| S>o{à{gEeZ H$mo nwZ… Omo‹S> {X`m OmVm h¡ Š`m|{H$ `h
not generate any cash outflow. Business firms H¡$e H$m AmCQ>âbmo Zht h¡Ÿ& Omo {~OZog \$åg© Bg nÕ{V
using this method usually prefer the project H$m Cn`moJ H$aVr h¢ do gm_mÝ`V… Cg àmoOoŠQ> H$mo àmW{_H$Vm
with the shortest payback period. The XoVr h¡ {OgH$m no-~¡H$ nr[a`S> g~go H$_ h¡Ÿ& _¡ZoO_oÝQ>
management may also establish a maximum {H$gr BZdoñQ>_|Q> ànmoOb H$mo ñdrH¥$V H$aZo Ho$ {bE EH$
payback period, say three or five years as a JmBS>bmBZ Ho$ ê$n _| A{YH$V_ no-~¡H$ nr[a`S> 3 `m 5
guideline to accept some investment proposal. df© ^r {ZYm©[aV H$a gH$Vm h¡Ÿ&
The merits of payback period method are: no-~¡H$ nr[a`S> _oWS> Ho$ JwU Bg àH$ma h¡…
(i) It is a very simple method for evaluating (i) `h BÝdoñQ>_oÝQ> ànmoOëg H$m _yë`m§H$Z H$aZo H$s
investment proposals. g~go gab _oWS> h¡Ÿ&

(ii) It focuses attention on the near term future (ii) `h {ZH$Q> ^{dî` na VWm H¡${nQ>b H$s [aH$dar Ho$
and liquidity of the firm by recovery of _mÜ`_ go {bpŠd{S>Q>r na \$moH$g H$aVr h¡Ÿ&
capital.
(iii) This method is particularly suitable in case (iii) `h nÕ{V {deof ê$n go CZ BÝS>ñQ´>rO Ho$ {bE Cn`wº$
of industries where the risks of h¡ Ohm± AàMbZ H$s [añH$ ~hþV A{YH$ h¡Ÿ&
obsolescence is very high.
However, it should be realized that the hmbm§{H$, `h Ü`mZ XoZo `mo½` h¡ {H$ no-~¡H$ nr[a`S>
payback period, as a method of risk analysis is _oWS>, [añH$ EZm{b{gg Ho$ {bE V^r Cn`moJr h¡ O~{H$
useful only in allowing for the risk that a H$moB© àmoOoŠQ> EH$ {ZpíMV Ad{Y VH$ Cgr àH$ma MbVm h¡