Scribd Logo
Upload

Welcome to Scribd!

  • Illustration of Payback Period

    Uploaded by

    Jia Mun Lew
    117 views1 page
    Payback period is the length of time required to recover the cost of an investment by calculating the number of years it takes for the cumulative cash inflows to equal the initial cash outflow. It is calculated by dividing the initial investment cost by the expected annual return and does not consider cash flows or benefits that occur after the payback period. While payback period is a simple method to evaluate investments, it is not the preferred method due to its limitations and other capital budgeting methods like net present value are generally used instead.

    Original Description:

    Original Title

    Illustration_of_payback_period

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    DOC, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    Payback period is the length of time required to recover the cost of an investment by calculating the number of years it takes for the cumulative cash inflows to equal the initial cash outflow. It is calculated by dividing the initial investment cost by the expected annual return and does not consider cash flows or benefits that occur after the payback period. While payback period is a simple method to evaluate investments, it is not the preferred method due to its limitations and other capital budgeting methods like net present value are generally used instead.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    117 views1 page

    Illustration of Payback Period

    Uploaded by

    Jia Mun Lew
    Payback period is the length of time required to recover the cost of an investment by calculating the number of years it takes for the cumulative cash inflows to equal the initial cash outflow. It is calculated by dividing the initial investment cost by the expected annual return and does not consider cash flows or benefits that occur after the payback period. While payback period is a simple method to evaluate investments, it is not the preferred method due to its limitations and other capital budgeting methods like net present value are generally used instead.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 1

    Illustration of payback period

    Payback period is the length of time required to recover the cost of an investment; usually
    stated in the number of years.

    Calculated as:

    All other things being equal, the better investment is the one with the shorter payback period.

    For example, if a project costs $100,000 and is expected to return $20,000 annually, the payback
    period will be

    $100,000
    $20,000, = 5 years.

    There are two main problems with the payback period method:
    1. It ignores any benefits that occur after the payback period and, therefore, does not measure
    profitability.
    2. It ignores the time value of money.
    Because of these reasons, other methods of capital budgeting like net present value, internal rate
    of return or discounted cash flow are generally preferred.

    You might also like