One method in selecting a project option is to use a numerical model. Briefly explain and Payback method noting the advantages and disadvantages.

The Payback Method is a simple investment appraisal technique that calculates the time required to "pay back" the initial investment from the cash inflows generated by the project.

Here's how it works:

1. Calculate the initial investment required for the project.
2. Estimate the cash inflows that the project will generate over its life.
3. Determine the payback period, which is the time it takes for the cash inflows to equal the initial investment.

Advantages of the Payback Method:

1. Simplicity: It is easy to understand and calculate.
2. Liquidity focus: It emphasizes the recovery of the initial investment, which can be important for liquidity management.
3. Risk exposure: Shorter payback periods reduce exposure to risks such as market or technology changes.

Disadvantages of the Payback Method:

1. Time value of money: The method does not consider the time value of money. Cash inflows received in the future are not discounted, which can overstate the value of the project.
2. Profitability: It does not consider cash inflows received after the payback period, potentially ignoring the overall profitability of the project.
3. Arbitrary benchmark: The decision rule (i.e., whether the payback period must be less than a certain number of years) is often arbitrary and not based on any economic or financial theory.