The paper "Advantages and Disadvantages of Payback" is a great example of a finance and accounting assignment. The payback method is famous with business analysts for different reasons. It is a very simple method. It is a very easy concept to understand. Employees of a different organization can easily understand the method. It is very important for each and every organization to understand their returns out of their investments. Every organization wants to get the quickest possible returns out of its investments. In this case, the payback method plays a very significant role in management.
It has great advantages in terms of measuring different investment risks. This method is very suitable for smaller projects. This method reveals different important information to the management. It is not a very good idea to spend lots of money and time conducting very sophisticated researches for smaller projects. In this situation, this method is very helpful. Disadvantages of paybackThis method doesn’ t consider the time value of money. The cash inflows from a project may be uncertain, as maximum returns are dependent on the future. One project may have a suitable rate of return but still may not meet the company's needed minimum payback period.
The payback method does not take cash inflows from a project that may take place after the preliminary investment has been gained. The payback method is not suitable for big projects. Big projects have different complexities which cannot be analysed with the help of the payback period. The payback period can be a reason for attractive project loss. This technique does not take care of the original useful lives of different assets. The payback period gives high importance to liquidity and overlooks profitability. Advantages of Net present valuesNet present values give importance to the time value of money.
Here in this method both before and after the cash flows of a project are taken into account. This is a great advantage of this method. Profitability and all risks related to the project are given significant importance. It has great contributions in terms of maximizing the firm’ s value. It is very important for financial managers to analyse different capital projects.
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