At first glance, investment Y may seem the reasonable choice, but suppose that the payback
The discounted payback period formula may be used instead to consider the time value of money, however the
Payback period reasoning suggests that project should be only accepted if the payback period is less than a cut-off period (payback period set by the business).So let us look at our Payback period example below.
If you are still not sure How to Calculate Payback period please watch our short instructional video which will help you understand the Payback period method and formula. It’s time that needed to reach a break-even point, i.e. We use two other figures in this calculation – the PV or Present Value and the CF or Cash Flow. or her own discretion, as no warranty is provided.
How to Calculate the Payback Period in Excel For example, if you invest $100 and the returns are $50 per year, you will recover your initial investment in two years. However, investment X will only return the initial investment whereas investment Y will eventually pay double the initial
The formula for the net present value method may be used to close this information gap in order to properly
Let us see an example of how to calculate the payback period when cash flows are uniform over using the full life of the asset. project or investment. For example, a $1000 investment which returned $500 per year would have a two year payback period. investment. This time-based measurement is particularly important to management for analyzing risk.
evaluate the best choice. paid annually, then the result would be 5 years. An investment with a shorter payback period is considered to be better, since the investor's initial outlay is at risk for a shorter period of time. All Rights Reserved © 2014-2017 - tiduko.com - Never Stop Learning.
Payback period is a financial or capital budgeting method that calculates the number of days required for an investment to produce cash flows equal to the original investment cost.
triple its initial investment. Given the additional information not provided by the payback period formula, one may consider investment Y to be
From the table below we can see that somewhere in the last quarter of the year 2. This can be … a period of time in which the cost of investment is expected to be covered with cash flows from this investment.
If $10,000 is the initial investment and the cash flows are
However, it is worth mentioning that although the net present value method may be preferable to determine long term