Using payback period rule will tend to be bias toward shorter-term investments.
Payback is a capital budgeting method that determines the amount of time it takes to recover the amount invested in a project from it cumulative cash flows.
Payback period = Amount invested / cash flow
For example, $100,000 can be invested in either project A or B. Project A will yield a cash flow of 50,000 each year over the next 5 years and project B will yield a cash flow of 20,000 over the next 10 years.
The payback period of project A = 100,000 / 50,000 = 2 years
The payback period of project B = 100,000 / 20,000 = 5 years
The investor would pick project A because of its shorter payback period.
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