– To investigate the importance of using
payback method in making capital budget decisions in relation to other appraisal
techniques used for capital budgeting decision in organizations. The paper also
included the examination of the importance of the payback method in relation to
simplicity, manager incentive compensation and the size of the company.
– The author used conceptual analysis using theories on payback period in which
secondary data from past research in African, European and American companies were
analyzed to determine the importance of the payback method in capital budgeting.
– The analysis show that
the payback method is preferred in appraising
capital budget decisions in various organizations
because of its
simplicity, liquidity and risk assessment
among many other advantages. Managers should complement payback method
with other methods in order to make a sound investment decisions.
Capital Budgeting, Payback Method, Payback Period,
Net Present Value, Internal Rate of Return, Real Options Approach
[1.] Ansari, S. (2000)
The Capital Budgeting Process, Mc-Graw-Hill Higher Education, USA
[2.] Bierman, H.
and Smidt, S. (2007) The Capital Budgeting Decision, Routledge, New York
[3.] Brealey, R.,
Myers S. and Allen F. (2006) Principles of Corporate Finance, Mc-Graw-Hill Higher
Education, New York
[4.] Grönhaug, K.
and Ghauri, P. (2005) Research Methods in Business Studies, Pearson Education, Harlow
[5.] Shapiro, A.
(2005) Capital Budgeting and Investment Analysis, Pearson Education, New Jersey
[6.] M. M. Kayali,
‘Real Options as a Tool for Making Strategic Investment
[7.] T.Lucy (1992)
3rd edition, Management Accounting
[8.] Colin Drury,
(2005) 3rd edition, Management Accounting for Business