What are the demerits of the payback period?

1. It fails to take into account the time value of money. Cash inflows are added without any discounting. This violates the most basic principle of financial accounting which stipulates cash flows accruing at different points of time can be added or subtracted after suitable discounting/compounding.

2. It does not take into account the cash flows after the payback period This leads to discrimination against projects which generate cash flows in later years

Sanisha Maharjan
Jan 18, 2022
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