Explain the concept of Pay Back Period. What are the limitations of Pay Back Period?
Payback period in capital budgeting refers to the period of time required to recoup the funds expended in an investment, or to reach the break-even point. For example, a Rs. 1000 investment which returned Rs. 500 per year would have a two-year payback period. The time value of money is not taken into account. Payback period intuitively measures how long something takes to "pay for itself." All else being equal, shorter payback periods are preferable to longer payback periods. Payback period is popular due to its ease of use despite the recognized limitations described below.
The term is also widely used in other types of investment areas, often with respect to
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