10.3.2—Payback and ARR

Payback measures how long a project takes to recover its initial cash outlay. Accounting rate of return compares average accounting profit with an investment basis. Payback emphasises liquidity; ARR emphasises reported profitability.

Payback ignores cash flows after recovery and often ignores time value; ARR depends on accounting profit and depreciation assumptions. Use each only for the decision purpose it can support.

Project A may recover cash quickly but earn little later, while Project B may have a slower payback but stronger long-term returns.

A shorter payback is not automatically the most profitable project.