Payback and the Value of Waiting to Invest

19 Pages Posted: 19 May 1997

See all articles by Glenn Boyle

Glenn Boyle

University of Canterbury - Economics and Finance; Sapere Research Group

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Abstract

Despite being rejected by finance theory, payback continues to be widelyused as a method for evaluating capital investment projects. In situations where investment can be delayed, we show that the value of waiting to invest is an increasing function of payback period. Consequently, the optimal investment policy is equivalent to requiring that a project with positive net-present-value be launched immediately if and only if its payback period is less than a critical value P*.

JEL Classification: G31, G32

Suggested Citation

Boyle, Glenn and Guthrie, Graeme, Payback and the Value of Waiting to Invest. Available at SSRN: https://ssrn.com/abstract=74 or http://dx.doi.org/10.2139/ssrn.74

Glenn Boyle (Contact Author)

University of Canterbury - Economics and Finance ( email )

Private Bag 4800
Christchurch
New Zealand

Sapere Research Group ( email )

Level 9, Pencarrow House
1 Willeston St
Wellington, 6140
New Zealand

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

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