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Importance of Payback Method in Capital Budgeting Decision

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Importance of Payback Method in Capital Budgeting Decision
School of Management

Blekinge Institute of Technology

THE IMPORTANCE OF THE PAYBACK METHOD IN CAPITAL BUDGETING DECISION.

By

Alaba Femi, AWOMEWE & Oludele Olawale, OGUNDELE

Supervisor: Anders Hederstierna

Thesis for the Master’s degree in Business Administration Fall/Spring 2008

THE IMPORTANCE OF THE PAYBACK METHOD IN CAPITAL BUDGETING DECISION.

By

Alaba Femi, AWOMEWE & Oludele Olawale, OGUNDELE

A thesis submitted in partial fulfillment of the requirements for the degree of MBA (Master of Business Administration)

Blekinge Institute of Technology

2008

Supervisor Anders Hederstierna

ii

Abstract Title: The importance of the Payback method in Capital budgeting decision.

Authors: Alaba Femi, Awomewe and Oludele Olawale, Ogundele

Supervisor: Anders Hederstierna

Department: School of Management, Blekinge Institute of Technology

Course: Master’s thesis in business administration, 15 credits (ECTS).

Background and Problem Discussion: The capital budgeting decision has been a very typical issue in the sustenance of a company. Several companies have lost their identity or liquidated due to wrong capital budgeting decision they made at one particular time or the other. Based on these prevalent problems in industries and the effect of globalisation on industries, it is important to use effective method to analyse investment before decision is made. Capital budgeting is extremely important because the decision made involve the direction and opportunity for future growth of the organisation. One of the traditional methods commonly used for capital investment appraisal by some organizations is the payback method, although this method has been criticized by academicians that it does not include the future cash flow and do not measure profitability. The wide acceptance of this method by practicing managers, has called for investigation as why is the method is still popularly used in organizations. In this thesis work, we


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