Page 41 - AFM Integrated Workbook STUDENT S18-J19

Investment appraisal

Payback period and duration

4.1 Introduction to the concept of payback

A project that ‘pays back’ its initial investment quickly is viewed favourably.

Projects with long payback periods are considered to be risky.

4.2 Traditional payback period and discounted payback period

 Payback period measures the length of time it takes for the
cash returns from a project to cover the initial investment.

 BUT this does not take account of the time value of money.

 Therefore, discounted payback period measures the length
of time before the DISCOUNTED cash returns from a project
cover the initial investment.

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