Answer to Question #206521 in Management for Prabhdeep

Question

SUBJECT : PROJECT PLANNING AND CONTROL

1. Give 2 points for usage and 2 points for application of Payback Period Method of capital Budgeting

Answer 1

When you're trying to decide between several capital projects, the payback period comes in handy. It's usually used when your small firm prioritizes liquidity, or cash flow, over profitability, or future returns. You'll need a technique to forecast your company's future cash flow before you can apply this strategy. When combined with other capital investment instruments like net present value or internal rate of return, the payback period method produces the greatest results. Although this capital budgeting formula aids in project selection, it is more of a supplement to a long-term profitability study, which helps you anticipate how much money you can expect to generate over longer periods of time. In addition, you should only use the payback period approach for particular departments; the approach isn't intended to cover the benefits and drawbacks of a project throughout your entire firm.

The payback period is used in making capital decisions. A number of flaws exist in the payback period formula. If the equipment lives differ by many years, for example, adding in the economic lives of the two machines could yield a drastically different result. One shortcoming of payback is that it does not account for the usable lifespan of the equipment or facility under consideration. Payback period is a useful project selection tool for small enterprises, especially when combined with other computations. You can manage spending and precisely forecast cash flow with the correct accounting software, which will help you enhance your assessment.