Demerits of Payback period
- The PB is more a liquidity than a profitability concept, for it places accent only on the recovery of cash outlay and stresses the importance of liquidity, that is recovery at the cost of profitability.
- It does not consider the earnings beyond the payback period. This may lead to wrong selection of investment projects. Profitable projects with long gestation periods or projects which generate high returns only after a certain period of time may be rejected under this method.
- The most serious limitation of this method is that it ignores the time value of money.
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