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4 Disadvantages of payback period

Payback Period Investment Appraisal Technique This is the method of investment appraisal based solely on cash flows and not profit. The payback period shows the number of years over which the investment would be recouped and measures how fast the investor can recover his/her initial investment.

Disadvantages of payback method of appraising investment project:

  • It does not take into account cash flows earned after the payback period.
  • It does not take into account time value of money.
  • It gives high emphasis on liquidity and ignores profitability.
  • It ignores the timing of the cash flows during the payback period.

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