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Some New Views on the Payback Period and Capital Budgeting Decisions

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  • H. Martin Weingartner

    (College of Business Administration, The University of Rochester)

Abstract

The Payback Period has been dismissed as misleading and worthless by most writers on capital budgeting at the same time that businessmen continue to utilise this concept. This paper seeks to identify the problems which businessmen try to solve by use of the payback period, so that better tools can be provided for solving these, since neither the present value nor the internal rate of return does so. In the course of the analysis the payback concept is considered in its role as a criterion versus a payback constraint, payback and liquidity of capital assets and the liquidity requirements of the firm, payback as a break-even concept, and payback as a crude measure of the rate of resolution of uncertainty. While payback is not advocated for capital investment decisions, the reasons for its popularity need to be understood before it is possible to develop superior alternatives.

Suggested Citation

  • H. Martin Weingartner, 1969. "Some New Views on the Payback Period and Capital Budgeting Decisions," Management Science, INFORMS, vol. 15(12), pages 594-607, August.
    • Handle: RePEc:inm:ormnsc:v:15:y:1969:i:12:p:b594-b607
    DOI: 10.1287/mnsc.15.12.B594
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    Cited by:

    1. Piubello Orsini, Luca & Leardini, Chiara & Danesi, Letizia & Guerrini, Andrea & Frison, Nicola, 2023. "Circular economy in the water and wastewater sector: Tariff impact and financial performance of SMARTechs," Utilities Policy, Elsevier, vol. 83(C).
    2. Jackson, Jerry, 2010. "Promoting energy efficiency investments with risk management decision tools," Energy Policy, Elsevier, vol. 38(8), pages 3865-3873, August.
    3. Anna Musz-Pomorska & Marcin K. Widomski & Justyna Gołębiowska, 2024. "Financial Aspects of Sustainable Rainwater Management in Small-Scale Urban Housing Communities," Sustainability, MDPI, vol. 16(2), pages 1-21, January.
    4. Stephen Decanio, 1994. "Agency and Control Problems in US Corporations: The Case of Energy-efficient Investment Projects," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 1(1), pages 105-124.
    5. Boyle, Glenn & Guthrie, Graeme, 2006. "Payback Without Apology," Working Paper Series 18957, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    6. Gatzer, Sebastian & Hoang, Daniel & Ruckes, Martin, 2014. "Internal capital markets and diversified firms: Theory and practice," Working Paper Series in Economics 64, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    7. Gatzer, Sebastian & Hoang, Daniel & Ruckes, Martin, 2015. "Internal Capital Markets and Diversified Firms: Theory and Practice," EconStor Preprints 169432, ZBW - Leibniz Information Centre for Economics.
    8. Anna Musz-Pomorska & Marcin K. Widomski & Justyna Gołębiowska, 2020. "Financial Sustainability of Selected Rain Water Harvesting Systems for Single-Family House under Conditions of Eastern Poland," Sustainability, MDPI, vol. 12(12), pages 1-16, June.
    9. Yard, Stefan, 2000. "Developments of the payback method," International Journal of Production Economics, Elsevier, vol. 67(2), pages 155-167, September.
    10. Paul K. Chaney, 1989. "Moral Hazard And Capital Budgeting," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 12(2), pages 113-128, June.
    11. Glenn Boyle & Graeme Guthrie, 2006. "Payback without apology," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(1), pages 1-10, March.
    12. repec:vuw:vuwscr:18957 is not listed on IDEAS
    13. Zhang, Chunbo & Hu, Mingming & Laclau, Benjamin & Garnesson, Thomas & Yang, Xining & Tukker, Arnold, 2021. "Energy-carbon-investment payback analysis of prefabricated envelope-cladding system for building energy renovation: Cases in Spain, the Netherlands, and Sweden," Renewable and Sustainable Energy Reviews, Elsevier, vol. 145(C).
    14. Lu, Qi & Narsilio, Guillermo A. & Aditya, Gregorius Riyan & Johnston, Ian W., 2017. "Economic analysis of vertical ground source heat pump systems in Melbourne," Energy, Elsevier, vol. 125(C), pages 107-117.
    15. Lefley, Frank, 1996. "The payback method of investment appraisal: A review and synthesis," International Journal of Production Economics, Elsevier, vol. 44(3), pages 207-224, July.

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