Advantages and disadvantages of pay back period, Financial Management

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Advantages:

It is easy to calculate and catch.
With the help of this technique, projects can be ranked in terms of their economic merits without much of complication.
It indirectly considers factors such as obsolescence and liquidity of investments because project with shortest payback period is exposed to less risks.
This technique is useful to the company experiencing shortage of cash because it assists in choosing a project that will yield a quick return of cash fund regardless of its long-term profitability.

Disadvantages:

It does not measure the profitability of the projects.
It fails to consider any receipts after the payback period, no matter how great they might be. As a result, a project with shorter payback period may be selected against a project with a longer pay back period but longer income producing life and greater return on investment.
It ignores time value of money.

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