New Zealand Institute for the study of competition and regulation inc.

Abstract

When interest rates are uncertain, the net-present-value threshold required to justify an irreversible investment is increasing in the length of a project's payback period. Thus, slowpayback projects should face a higher hurdle than fast-payback projects, just as investment folklore suggests. This result suggests that the widely disparaged use of payback for capital budgeting purposes can be an intuitive response to correctly perceived costs and benefits.