Disadvantages of Simple Payback Period

1. Am I using the right figures? 
   - How did I calculate my costs?
   - How did I calculate my savings?  

2. What about the time value of money?  
3. What about the period after the payback?  
4. Must the project’s SPP be less than or equal to the holding period for the property into which the measures are being installed? 
5. Can SPP reflect cash flow probabilities?  
6. Do SPP “rules of thumb” even make sense?  
7. In Landlord/Tenant settings, whose SPP am I calculating?  

Just in case you are thinking, “Wait, but I use Return on Investment!” The “current year ROI” variant of Return on Investment (ROI) is the reciprocal of SPP and suffers from very similar shortcomings. SPP is the first cost divided by Year 1 savings. Current year ROI in Year 1 is calculated by dividing first cost by the savings in Year 1.

EXAMPLE: 

$100,000 investment saves $25,000 in YR1 
SPP = $100,000 divided by $25,000 = 4 years 
ROI = $25,000 divided by $100,000 = 25%