8.3 Payback period
a. Payback period is a kind of “break-even” measure. To actually compute the payback period, it is assumed that any cash flow occurring during a given period is realized continuously throughout the period, and not at a single point in time. The payback is then the point in time for the series of cash flows when the initial cash outlays are fully recovered. The payback criterion decision rule is to accept projects that payback before this cutoff, and reject projects that take longer to payback.
b. The payback period rule ignores the time value of money; requires an arbitrary cutoff point; ignores cash flows beyond the cutoff date; biased against long-term projects, such as research and development, and new projects.
c. The payback period rule is often used by large and sophisticated companies when they are making relatively minor decisions. The primary reason is that many decisions simply do not warrant detailed analysis because the cost of the analysis would exceed the possible loss from a mistake. Second, because payback rule is biased towards short-term projects, it is biased towards liquidity. Third, the cash flows that are expected to occur later in a project’s life are probably more uncertain.

8.4 Average accounting return
a. The average accounting return is interpreted as an average measure of the accounting performance of a project over time, computed as average net income divided by its average book value. The decision rule is that a project is acceptable if its average accounting return exceeds a target average accounting return.
b. The average accounting return is not a true rate of return and time value of money is ignored; it uses an arbitrary benchmark cutoff rate; it is based on accounting net income and book values, not cash flows and market value. For a financial manager, both the reliance on accounting
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