The payback reciprocal overstates the true rate of return because it assumes that the annual cash flows will continue forever. It also assumes that the annual cash flows are identical in amount. Since these two conditions are unrealistic you should avoid the use of the payback reciprocal. Instead, you should compute the

*internal rate of return*or the

*net present value*because they will discount each of the actual cash amounts to reflect the time value of money.

*To learn more, see the Related Topics listed below:*