Question

4. Why is a long payback period of seven years for an investment in a recruiting candidate assessment center more risky for an employer than a shorter payback period of two years for the same investment? (30 points)

Answer 1

Payback period is the period of time required for a initial investment to recover. It is similar to a break-even point from a time period.

Payback period is generally calculated for a investment/ project which requires large amount of initial capital investment thereafter generate profits.

In our example the initial capital investment is the recruitment candidate assessment center.

Suppose a Human resource company ABC has to decide between two companies for a $1 Mn project in recruitment candidate assessment center.

When a company makes investment, it is a cost to the company; in our case the initial cash outflow of $1 Mn is huge cost to the company.

The company may raise this capital by debt / internal company funds. Thus it is very important to have a shorter the payback period so as to when the investment will break even and start giving returns so that the company can repay its debt

Thus payback period of 2 years is better than 7 years, as after 2 years the recruitment candidate assessment center will start generating profits vs 7 years where the company has to wait for 7 years to break even.