Page 310 - SBL Integrated Workbook STUDENT 2018
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Chapter 23
5.2 Payback period
The payback period is the time a project will take to pay back the
money spent on it; the time which elapses until the invested capital is
recovered.
Initial investment
Payback period =
Annual cash inflow
Compare the payback period to the company’s maximum return time
allowed and if the payback is quicker the project should be accepted.
Faced with a choice between mutually exclusive projects, chose the
project with the quickest payback, provided it meets the company’s
target payback period.
Suitability This is best for short projects where there is a shortage of cash for
investment.
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