Business – 10.3 Investment appraisal – Concept of investment appraisal | e-Consult
10.3 Investment appraisal – Concept of investment appraisal (1 questions)
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| Criterion | Payback Period | Net Present Value (NPV) |
| Focus | Time taken to recover the initial outlay | Value added to the firm in present‑value terms |
| Cash‑flow consideration | Only cash flows up to the break‑even point; ignores later cash flows | All cash flows over the project's life, discounted |
| Risk assessment | Provides a crude measure of liquidity risk | Incorporates time value of money and can include risk‑adjusted discount rates |
| Ease of use | Simple calculation, easy to communicate | Requires more data and calculation, but software makes it manageable |
| Decision rule | Accept if payback ≤ firm’s maximum acceptable period | Accept if NPV > 0 (or if NPV of one project exceeds another) |
In summary, the Payback Period is useful for quick liquidity checks, especially in high‑risk environments, but it ignores profitability after the break‑even point. NPV provides a comprehensive measure of value creation, accounting for the time value of money and risk, making it the preferred technique for most strategic investment decisions.