A Study on Payback Method in Capital Budgeting Decision

A Study on Payback Method in Capital Budgeting Decision

Abstract

Purpose – To examine the significance of utilising the payback approach in making capital budget choices in comparison to other evaluation methods utilized in companies for capital budgeting decisions. The study also looked at the significance of the payback approach in terms of simplicity, management incentive compensation, and business scale.

Design/methodology/approach – To evaluate the significance of the payback method in capital budgeting, the author utilized conceptual analysis utilising theories on payback period in which secondary data from previous research in African, European, and American businesses were examined.

Findings – According to the research, the payback approach is favored in evaluating capital budget choices in different companies due to its simplicity, liquidity, and risk evaluation, among other benefits. Managers should use additional techniques in addition to the payback method to make good investment choices.

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Introduction

Capital budgeting is allocating a company's capital resources among competing projects and investments. This assessment necessitates calculating the amount and timing of any additional cash flows generated by the project. This indicates the riskiness of the investment and is evaluated by the volatility of cash flows while taking the financing mix into consideration. Businesses should, ideally, seek initiatives and opportunities that increase shareholder value. However, since the quantity of money available for new projects at any particular moment is limited, management must utilise capital budgeting methods to decide which initiatives would produce the highest return over an appropriate time period. 

The author has addressed common capital budgeting techniques such as net present value (NPV), internal rate of return (IRR), Real Option, and payback period. The author investigated the reasons why key decision makers in companies continue to adopt the payback period technique despite opponents' concerns in this thesis study. The findings of studies performed in Europe, America, and Africa have verified the method's widespread popularity, owing to its simplicity, liquidity, and incentive packages for managers, among other factors.

For More Details About a Study on Payback Method in Capital Budgeting Decision Please Visit Our Website


Or call us +91 9481545735

Conclusion

In conclusion, when all of these studies are combined, it is clear that businesses prefer the usage of the pay back technique, and empirical assessments show how this approach has gained favor among other investment strategies in the sector. According to the research, the payback approach is favored in evaluating capital budget choices in different companies due to its simplicity, liquidity, and risk evaluation, among other benefits. Another reason why managers have kept this old technique in operation is that managers will always want to employ evaluation methods that will support their incentive plan, which is always linked to accounting earnings. 

The author also showed that while assessing investment projects, managers should account both risk and uncertainty. Managers should use additional techniques in addition to the payback method to make good investment choices.

For More Details About a Study on Payback Method in Capital Budgeting Decision Please Visit Our Website


Or call us +91 9481545735

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