Explain the pros and cons of using this method to evaluate a capital expenditure.

Investment decision : payback period :

Payback periods are a simple way to estimate capital investments. They can also be used to quickly see how much money is repaid on an asset. This method doesn’t take the time value into consideration, but it can make certain investments appear more lucrative than they are. This method also allows comparisons of different projects and gives an estimation for the return on investment.

One of the cons of using this method is that it does not consider cash flow once the break-even level has been reached. It can cause managers to ignore long-term assets in favor of ones that offer faster returns. It is also inaccurate in estimating profitability over a longer period of time, as it does not take into account timing differences between cash flows. This method may also hide important data, like the rate of profit or risk associated with long return cycles. When calculating, business owners must also take taxes into consideration. If these aren’t taken into account properly during evaluations, they can affect the net profit margins.