Payback period for a proposed capital budgeting project

Question

How can we estimate the payback period for a proposed capital budgeting project? What are the major problems of the payback method?

Answer 1

We estimate the a proposed project’s payback period by including a project’s positive cash flows one period at a time until the sum becomes equal to the initial investment. Payback period is the number of time periods it will take to cover this investment. The major problems of the payback process are the flows of cash after the money’s time value is not considered and the payback period are ignored.