Advantages of payback methods

A payback period is the number of years that a firm takes to recover a project's cost. A regular payback method always ignores the cash flows beyond the payback period and also does not consider the time value of money. It identifies the risk and liquidity of the project.

Then comes the discounted payback method that is similar to the regular payback period except that it discounts cash flows at a firm's cost of capital. It considers the time value of money and ignores cash flows beyond the payback period.

Another type of payback method is the Net Present Value method that involves discounting all cash flows at the project's cost of capital and the summing all inflows. This project is accepted if the net present value is positive. To determine the feasibility of the respective project, IRR is the discount rate that forces the NPV to equal zero. The project is accepted if the IRR is greater than the cost of capital. Another modified way to comprehend the feasibility of some project is the MIRR method. This method corrects some problems with the IRR method. MIRR method involves calculating the terminal value of the cash inflows compounded at the firm's cost of capital and then determining a discount rate at which the terminal value equals the present value of the outflows.

Then comes the discounted payback method that is similar to the regular payback period except that it discounts cash flows at a firm's cost of capital. It considers the time value of money and ignores cash flows beyond the payback period.

Another type of payback method is the Net Present Value method that involves discounting all cash flows at the project's cost of capital and the summing all inflows. This project is accepted if the net present value is positive. To determine the feasibility of the respective project, IRR is the discount rate that forces the NPV to equal zero. The project is accepted if the IRR is greater than the cost of capital. Another modified way to comprehend the feasibility of some project is the MIRR method. This method corrects some problems with the IRR method. MIRR method involves calculating the terminal value of the cash inflows compounded at the firm's cost of capital and then determining a discount rate at which the terminal value equals the present value of the outflows.