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Why does it say payback period is a risk focused approach??
Even if there was a max arbitrary period it wouldve focused on uncertainty as that is what is clearly related to length of project and not risk
When appraising a project, the future cash flows are only ever estimates and there is therefore risk that the estimates are wrong.
The further into the future we are forecasting, the more uncertain the estimates become.
The sooner that a project pays for itself (so the shorter the payback period) then the more confident we can be that it actually will pay for itself, because we will be more confident of the early flows being achieved.
(If a project has a payback period of 2 years, then we are more confident that it will actually pay for itself then if it had a payback period of 10 years – the estimates of flows in 10 years time are going to be nothing more than a pure guess 🙂 )
So it is completely correct to say that pay back is a risk focused approach
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