- The payback period is the amount of time it will take a project before the accrued benefits surpass accrued costs or how
much time an investment takes to recover its initial cost
- track the net cash flow across each year to determine the year that net benefits overtake net costs (not discounted cash
flows)
- Many organizations want IT projects to have a fairly short payback period (< 1 year)
Example:
- Same numbers as earlier examples. Table shows net cash flows
- Project 1 payback occurs sometime during year 4.
- Project 2 payback occurs sometime during year 3.
- The payback period ignores the time value of money but offers a glimpse at the potential risk associated with each of
the projects. A longer payback period generally infers a riskier project. The longer it takes before a project begins to
make money for the organization, the greater the chances that things can go wrong on the project.
- Organizations can set a maximum number of periods, such as 18 months, and any project that doesn't break even
before the maximum is not considered further.
francis1897 answered the question on
March 13, 2023 at 09:00