The payback method
The payback method is a popular way to analyse investment proposals.
i. Explain how the payback period is determined and how projects may be ranked using this method.
ii. What are the deficiencies of the payback method?

i. The length of time required to recover the initial investment is referred to as the payback period. Projects can be ranked by the length of time required with the shortest time being viewed as best.
ii. There are two major deficiencies. The payback-period method completely ignores cash flows that occur after the end of the payback period. The method also is not sensitive to the time distribution of cash flows within the payback period.