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Why do smaller firms use the payback capital budgeting technique?

  1. Why do smaller firms use the payback capital budgeting technique?
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Payback period refers period of time required by investment to repay sum of original investment. Suppose initial investment is -1000$ and cash flow are 500$ for 4 years than payback = 1000/500 = 2 years,means company will company will get $1000 of it's investment back in 2 years.

Smaller firms are short of capital and because of it's risk they are unable to borrow more amount. So at particular point of time , if there are more than one attractive project they are forced to choose one. Hence they select project which requires minimum time to recover its initial investment so that the can capitalize other investment opportunies.

Thus smaller firms use the payback capital budgeting technique

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