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A Comment on Payback

Published online by Cambridge University Press:  19 October 2009

Morris Mendelson
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Extract

In a recent note in this journal, Professor Levy discussed the relative merits of the payback method and the discounted rate-of-return (IRR) method. In examining the relationship between K (IRR) and Kp (the reciprocal of the payback), he reaffirmed that the two were approximately equal based on the assumption that:

(1) annual earnings were the same every year, and

(2) ,

where N is the life of the asset.

Type
Communications
Information
Journal of Financial and Quantitative Analysis , Volume 6 , Issue 4 , September 1971 , pp. 1159 - 1160
Copyright
Copyright © School of Business Administration, University of Washington 1971

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References

1 Levy, Haim, “A Note on the Payback Method,” Journal of Financial and Quantitative Analysis, 3 (December 1968).CrossRefGoogle Scholar

2 Gordon, Myron J., “The Payoff Period and the Rate of Profit,” Journal of Business, 28 (October 1955).Google Scholar

3 The tables used in the. present calculations were those in Bracken, Jerome and Christenson, Charles J., Tables for Use in Analysing Business Decisions (Homewood, Illinois: R. D. Irwin 1965). In the example above no attempt to interpolate was made.Google Scholar

4 See Goldsmith, Raymond, The National Wealth of the United States in the Post-War Period (Princeton: Princeton University Press 1962), p. 340.Google Scholar