The payback method calculates a project’s payback period as a measure of how long it takes the project to pay for itself. More formally, it is the time necessary for a project to generate cash flows sufficient to recover its cost. Projects with payback periods less than a management-determined cutoff are acceptable. Projects with longer paybacks are rejected. The payback method has none of the characteristics we want from a project selection method. First, it ignores the time value of money, summing periodic cash flows without regard for the differences in the present values of those dollars. Second, the payback method fails to account for all relevant cash flows, ignoring those that accrue after the payback period. Third, the payback period gives no indication of the absolute change in shareholder wealth due to a particular project. Finally, the decision criterion is quite subjective. The determination of an appropriate payback period is based solely upon management’s opinions and perceived needs. It has no relationship to the project’s required return. Some firms use a discounted payback method, in which the payback is computed using the pre- sent value of the cash inflows.