Payback period for project b therefore payback for

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Payback Period for Project B Therefore, Payback for project B is between 3 and 4 years 3 yrs + (amount needed after 3 years) (cash flow year 4) = 3 + ( $20k / $40k ) = 3.5 years Decision Rule for Payback Period If mutually exclusive (one or the other) choose lowest payback period. If not mutually exclusive (can choose both) then choose according to cutoff (below cutoff) Payback Period Advantages: 1. Easy to understand 2. Emphases liquidity Disadvantages: 1. Ignores time value of money (TVM) 2. Ignores cash flows after payback 3. Arbitrary cutoff 4. Biased against long-term projects and projects with R&D
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