When Payback Helps, and When It Lies
Use payback as a liquidity screen while recognizing why it cannot replace NPV.
The move: use payback as a screen, not the verdict. Payback is popular because everyone understands time-to-recovery. That simplicity is useful in businesses where cash is tight or project risk rises sharply with time. If a plant upgrade must recover before a lease expires, payback is a legitimate constraint. What payback sees It sees speed. A shorter payback reduces exposure to forecast error and helps liquidity planning. What payback misses It does not measure total value. A project that recovers in year two and then produces seven years of cash can be better than a project that recovers in year…
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