The Payback Period as a Measure of Profitability and Liquidity

The Payback Period is one of the most popular project evaluation criteria. As much as it is liked by practitioners as a measure of liquidity and risk exposure, it is criticized by academicians who seriously question its validity as a profitability criterion. This paper examines the classical definition of the Payback Period criterion for investment projects, and re-formulates this criterion in a way that frees it from the shortcomings of the old definition and makes it compatible with the Net Present Value criterion. It is also shown that the traditional approach to the comparison of mutually exclusive projects by means of the Payback Period criterion has been inadequate, and the proper approach to this problem is presented.