Payback Period

Example
Loan 3,000,000 can pay 1 mil per year
Payback

Data Given
Timelines Net Cash Flow
Yo (20,000)
Y1 (1,600)
Y2 (140)
Y3 6,600
Y4 11,500
Y5 14,500

Solution
Timelines Net Cash Flow Running Balance
Y0 (20,000) (20,000)
Y1 (5,000) (25,000)
Y2 6,000 (19,000)
Y3 18,000 (1,000)
Y4 6,000 5,000
Y5 6,000 11,000

Last Negative Balance (1,000) 3 yrs

Next year's net inflow 6,000
Per month inflow 500
No. of months reqd to recover negative balance (2.0)
So, Payback period is: 3 Yrs & 2 months
OR 3 yrs + 2/12 = 3.17 years

Discounted Payback
New Data (Given)
Timelines Net Cash Flow
Yo (20,000)
Y1 (5,000)
Y2 6,000
Y3 18,000
Y4 6,000
Y5 6,000

Find Discounted Payback Period if Discount Rate is 10%

Solution
Timelines Net Cash Flow PV Running Balance
Yo (20,000) (20,000) (20,000)
Y1 (5,000) (4,545) (24,545)
Y2 6,000 4,959 (19,587)
Y3 18,000 13,524 (6,063)
Y4 6,000 4,098 (1,965)
Y5 6,000 3,726 1,760

Last Negative Balance (1,965) 4 years

Next year's net inflow 3,726
Per month inflow 310.46
No. of months reqd to recover negative balance 6.33
So, Discounted Payback period is: 4 years & 6 months (Rounded)
i.e. 4.5 years