How do we calculate the payback period for a proposed capital budgeting project? What are the main criticisms of the payback method?
We calculate the reimbursement period for a proposed project by adding a project's positive cash flows one period at a time until the sum equals the initial investment. The number of time periods it obtain to cover this investment is the payback period. The major criticisms of the payback method are that cash flows after the payback period are ignored and the time value of money is not considered.