Payback's Use In Different Industry

Because of its serious defects, payback method of investment appraisal has always been the subject of considerable criticisms in the literature. This research re-examines the issue of payback continued use in relation to industry sector to which a particular company belongs. It asks the question: Is the use of PB influenced by the rate of change in a particular industry, and whether, because of the rapid change, PB is used more in the IT industry then in the Food industry?The continued use of PB has been, according to previous studies, linked to many reasons. Such as it is used as a secondary tool to complements other techniques rather then a primary tool, it is easy to use and simple to understand Drury. It has a communication role; PB is primarily used to communicate capital budgeting proposals and decisions Chen and Clark. It is used because of the Owner-manager-conflict where the method is used to benefit mangers at the expense of shareholders long-term benefit Pike H. PB is used as a proxy for projects duration Calvin M. Boardman. PB is the best in dealing with the risk and uncertainty attribute of projects Kee and Bublitz.This study found that, IT industry-related companies have made an excessive use of payback method as a primary tool for investment appraisal than those companies belonged to Food industry.This has been found because; In the IT industry, the environment is rarely static and changes quickly, consequently leading companies, in order to safeguard against risk, to seek projects that have a quick and enough return relative to the initial capital spent, in the early years. Whereas in food industry, the environment is never dramatic and investing for long term in long-life products was a normal practice. Thus resulting in companies being less worried about future returns from those projects, and making more use of the DCF techniques. Payback technique, if anything, will be only used because of some problems such as a current shortage in firm's cash flow.