The Importance of Payback Method in Capital Budgeting Decisions

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Authors : Jones Stamalevi


Purpose – 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.

Design/methodology/approach – 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.

Findings – 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


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