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Chapter 2

Payback

3.1 Payback technique

The payback technique considers the time a project will take to pay back the money
invested in it. It is based on expected cash flows. To use the payback technique a
company must set a target payback period.

Decision criteria

 Compare the payback period to the company's target return time
and if the payback for the project is quicker the project should be
accepted.

 Faced with mutually exclusive projects choose the project with
the quickest payback.

Question 4

Payback

A project requires an initial investment of $1,000,000 and then earns net cash
inflows of $150,000 per year for 7 years.

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