Payout Method

This method is the fastest and easiest way to calculate the time required to recover the invested money in the project, but it cannot account for the project interest rate of return. Calculating the time period is simple, as shown in Figure (3.4).

The time required to recover the money invested is called payout time. This factor depends on the expertise of the decision-maker. It is also a very important factor in politically unstable countries and any other situations in which the project decision-maker has an even greater responsibility to be able to recover the capital in the shortest possible time.

The disadvantage of this method is that it cannot calculate the interest rate of return for a project, which varies according to each project and the value of the initial investment. Broadly

Payout Method

speaking, however, given a general idea of the itinerary of the project economically, the time it will take to recoup the investment is a major deciding factor in the management of the project.

In spite of the many advantages of the payout method, alone it is not a complete measure of the value of money for the following reasons:

• It does not indicate profit following payout.

• It does not measure total profit.

• Time value of money is not formally included.

• It varies depending on different types and magnitudes of investment.