payback period measures.... measures, period

xiaotutu

any suggestions..

spartanag07

i think it's all the three things at the same time but can't figure out which one of them is dominant. The longer the payback, the lower the liquidity since the money is tied up in the investment. The longer the payback, the lower the profitability, since the longer payback makes the money unavailable for other profitable investments. It can be also risk since a long payback means that the probabilities that sth will happen in the meantime to delay or lengthen the period are high.

homie

its mainly liquidity - not profitability cuz payback doesn't consider cash flows after investment has been covered which mite be negative nd indicate losses - nd would only measure liquidity risk not other types of risk

dece2011

I agree, its mainly liquidity because you dont consider the future Cash Flows once ur Initial Investment is paid back to you in payback calculations.

Smaller the payback lower is the risk of getting your initial invetment (not necessarily returns) back and vice versa, but i dont consider Payback gives back total measure of risk, since u enter into projects/Capital investments cause it gives you over and above Rq rate of return. (Payback doesnt consider this spread). It only tells u when u r going to breakeven. It may happen that you may not get any further cashflows after PB / Negative Cash Flows , and PB does not consider this, still this can be considered risky since you could have used that money for more productive use somewhere else (opp. Cost) and earned more return. But with payback period u will still accept such projects (which only are breakeven or have -ve cfs after payback)

Payback does not consider profits so its not a measue of profitability.

Pl. Correct me if i m wrong here.

Mechanic

+1 for liquidity. You dont want your $ tied up for a long time. The sooner it is out, assuming identical NPV, the better off you are.

leadcfa

liquidity!

agulani

profitability?



Edited 2 time(s). Last edit at Wednesday, December 8, 2010 at 10:16AM by mriz21.