School Case

Banks as a whole have capitalized on designing a system that measures the risks associated with their different lines of business. The main reason for these risk measurements is to provide the bank managements with a more consistent way to define the amount of capital necessary to support each major activity and in the long run then they can determine the overall leverage of the bank as a whole. Since the banking industry has chosen to offer a wide range of services and products, there are many more regulatory guidelines that allow banks to proceed with caution for example, when it comes to fees that they charge. I can see how banks can be seen or compared in resembling that same process of internal capital budgeting. Banks have the same objective of justifying the cost of external financing. This process is also done in order to contribute to the general cash flow of the bank.

Profitability. The payback method focuses solely upon the time required to pay back the initial investment; it does not track the ultimate profitability of a project at all. Thus, the method may indicate that a project having a short payback but with no overall profitability is a better investment than a project requiring a long-term payback but having substantial long-term profitability.

Payback period can be a useful tool for companies that are facing luiquidity problems, it also provides a good ranking of projects that would return money early.