Does Using Payback Analysis Pay?

Relying on the method to assess projects may make sense in certain circumstances

Andrew Sloley, Contributing Editor
payback analysis mn

Last month, we examined using net present value (NPV) and internal rate of return (IRR) for evaluating project economics (“Properly Assess Economics”). Both NPV and IRR consider the time value of funds. NPV focuses on maximizing wealth generation (quantity) from projects. IRR focuses on maximizing investment efficiency (percentage return) from projects. Other evaluation methods often are used as well. One of the simplest is payback, which is the time a project requires to return the total amount invested. Payback ignores the time value of money. This seems to run counter to the commonly accepted basis that money has a time value. Many economists insist that a method…

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    By Andrew Sloley, Contributing Editor

    Last month, we examined using net present value (NPV) and internal rate of return (IRR) for evaluating project economics (“Properly Assess Economics”). Both NPV and IRR consider the time value of funds. NPV focuses on maximizing wealth generation (quantity) from projects. IRR focuses on…

    Full Story
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