Liquidity Needs

• Firms that have the most current liquidity needs often use the payback method for their project evaluation. Those firms often are newer companies that are short in cash or companies with a large debt load requiring ongoing debt payments. The more and faster a project can generate cash flows to recover initial investments, the easier it is for those firms to meet their other pressing liquidity needs. Using the payback method, firms can estimate the amount of time it will take to get back their initial investment cash that can then be directed for other liquidity uses.
  
  

Future Uncertainties

• Firms with a higher degree of future uncertainties in their industries and business operations may prefer to use the payback method. Those firms believe that the longer it takes to recover their original investments, the more exposed they are to future uncertainties that they consider high for their businesses. Using the payback method for project evaluation, firms can simply reject projects with payback periods that exceed their target years for returning investments. The payback method is essentially is risk control measure for firms that have higher future uncertainties.
  
  

Technological Changes

• Firms with rapid technological changes in the products or services they offer should consider the payback method in their project evaluation. Those firms often need to know if the technologies used in their products or services may quickly become obsolete before they can recover the capital investments used to develop the products or services. Therefore, using the payback method, firms can find out how long a new technology must survive for them to recover the costs of developing it.
  
  

Investor Relations

• Firms that have a need to improve their investor relations to better attract future investment funds may consider the payback method for current project evaluation. If those firms can show shorter payback periods for their current investment projects, it helps management to establish a level of credibility with investors regarding the company's ability to return potential investments sooner. Such reputations once known by investors can become a positive factor in a firm's fundraising efforts.