e allows one to calculate how long it would take for a project to recapture the cost of the initial investment (Noreen, Brewer, & Garrison, 2014, p. 327).  The calculation is simple as it is the total cost of the project divided by the estimated cash inflows expected each year.  The end result is the number of years to recover the initial cost, or the payback period. As an example, my employer used this method as a guideline when deciding which research projects should/should not be undertaken.  Although the assumption is that most research projects will generate revenue for the organization, it isn’t known how long it will take before the healthcare organization recoups the investment they initially put into the project to get it off the ground. Based on the results of the payback method, leadership will decide whether or not to accept or reject the project if the payback period is too far out of their comfort zone.

There was a case recently in which one of our research sites proposed a new project that would study a new therapeutic drug used to potentially treat individuals affected by Parkinson’s disease.  The example is just an approximation of costs as I do not know the exact dollar amounts proposed for the project. The proposal stated that the yearly revenues generated from this new research study would be approximately $100,000 and the initial investment required would be $1 million dollars.  Therefore, the payback period would be 10 years: 1,000.000 (initial investment) / 100,000 (yearly inflows) = 10 years.  This project was hotly debated because some members of upper leadership wanted the payback period to be no longer than 7 years.  However, other leaders felt that although it would take slightly longer to recoup the investment, the project was actually going to last for 20 years instead of 10 years.  After 10 years, the organization has recovered their initial cost and the remaining 10 years would be revenue of approximately $1 million.  This doesn’t include the potential revenue if the new drug becomes FDA approved and can be used on a much larger population of patients within the entire healthcare industry.  Even though the payback method has flaws because it does not take into account the time value of money, leadership did decide to accept this particular project simply based on the potential revenue growth and healthcare benefit this could provide if the new treatment improved the overall health of those patients affected by the disease.

Another useful tool when evaluating capital investments is the internal rate of return (IRR), which does consider time value of money.  In terms of the project discussed above, the internal rate of re