A Complete Definition And Computer Aided Examination Of The Payback Period Project Evaluation Criterion

The Payback Period (PBP) is one of the most widely applied project evaluation criteria 'in the mineral industry. As much as this criterion is liked by practitioners, it is also criticized by academicians who seriously question its validity. Inspired by this criticism, the author of this paper examines the classical definition of the PBP criterion, and formulates a new one designed for both investment and borrowing projects. It is demonstrated that the PBP, in its revised version, is free from all the shortcommings of the old one, and is fully compatible with the Net Present Value (NPV) criterion, as well as with all the other NPV compatible project evaluation criteria. Since the traditional approach to the comparison of mutually exclusive projects (MEP1s) by means of the PBP criterion has been incorrect, the paper also outlines the correct approach to this problem. Finally, owing to the fact that the PBP depends on the assumed interest rate, and using a specially developed computer program, the PBP is graphically presented, in six numerical examples, as a function of the interest rate.