Payback Method
It is the period needed to generate back the money capitalized in an asset from its remaining cash flows. It is a secure method of risk evaluation that is linked to a planned project. Therefore, it is better to have an investment with a payback time, which is short, because the financier’s initial expenditure is at risk for a shorter time. Its formula is dividing the cash outflows by the net cash influxes (Ardalan, 2012).
Limitations of the Payback Method for Making Capital Budgeting Decisions
It ignores the scheme’s profitability. There might be very little, or no profits generated due to reduced cash flows at the end of the payback time, consequently the investment becoming impracticable.
The business venture’s return on investment is not considered. In addition to not factoring in its profitability, this method does not provide a full analysis of the project’s attractiveness to obtain cash flows when the payback time ends. Some businesses need capital that exceeds the rate of return barriers, or else the plan fails.
It disregards the time value of money. Cash flows obtained in later years get lower weight than cash flows generated during the project initial years. Furthermore, it ignores the cash flows reached subsequently after the payback period (Woodruff, 2019).
Importance of Integrating Data in a Business/ Firm
It intensifies system adoption by utilizing pre-constructed templates that allow the sales team to access essential data about sales orders and customers. There is better decision making that aids in developing the business. It enriches customer relationship management. Moreover, data integration bolsters a firm’s competitiveness, utilizes fewer resources, and increases the business’ returns on investment (Lund, 2020).
References:
Ardalan, K. (2012). Payback Period and NPV: Their Different Cash Flows. Journal of Economics and Finance Education, 11 (2): 10-16.
Lund, H. (2020, February 12). Six benefits of data integration. Rapidi: Data Integration & Peoples Business. https://www.rapidionline.com/blog/6-benefits-erp-crm-data-integration
Woodruff, J. (2019, February 4). Advantages & Disadvantages of Payback Capital Budgeting Method. Business Chronicles. Hearst Newspapers, LLC. https://smallbusiness.chron.com/advantages-disadvantages-payback-capital-budgeting-method-14206.html