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Payback period is the number of years required to recover the cost of project or initial cash out flows. Say a project requires an initial investment of $10,000 and you can expect cash inflows at the end of each of the next four years in amounts of $5,000 $4,000 $3,000 and $1,000
N---- CF ----------- Cumulative Cash Flow
0---- -10,000(p)
1---- 5,000 -------- 5,000
2q-- 4,000 -------- 9,000 r
3---- 3,000s ------ 12,000
4---- 1,000 -------- 13,000
As we notice that year before recovery is 2. And to get the remaining months out of Year 3, we do the following calculations
(10,000 - 9,000)/3000
1,000/3,000
0.333 years
0.333 x 12 months
4 months
Thus regular payback period is 2 years and 4 months.
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Limitatios of payback period?
- the payback period is to dependent on cash inflows which are hard to predict. - The payback period only considers revenue, does not consider profits.
How do you calculate a payback period?
The payback period is ascertained by calculating the number of years needed to recover the cash invested in a project, For example, an investment of 1000 provides a return of 200,300,500 in consecutive three years. Then total of return in 3 years will be equal to the original investment. Hence the payback period is three years.
How do you calculate payback period for an asset?
assets value $200000and number of year five cash flow is 70000,80000, 90000,90000and100000.and depreciation are $40000 each year .find out payback period for each assets
What are the disadvantages of the discounted payback period?
It's not a direct measure of a project's contribution to stockholder's wealth. You may reject project's that should be accepted when using the NPV analysis (best method used for determining whether or not a project is accepted in Capital Budgeting). Discounted Payback Period AdvantagesConsiders the time value of money Considers the riskiness of the project's cash flows (through the cost of capital) Disadvantages No concrete decision criteria that indicate whether the investment increases the firm's value Requires an estimate of the cost of capital in order to calculate the payback Ignores cash flows beyond the discounted payback periodYounes Aitouazdi: University of Houston Downtown
How do you calculate payback period using bail-out method?
Initial Net Investment / (Annual expected cash flow + salvage value)
Which investment rule may not use all possible cash flow in its calculations npv payback period or irr?
payback period
What is a payback period?
payback period , it is to pay your period on time jajajaja
What is the formula for the payback period?
Formula for the Payback Period. Payback period = Initial investment / Annual Cash inflows
Adavntages of using payback period?
advantages of payback period?
What is meant by the payback period?
Something is meant by the payback period. It is the length of time taken to recover the cost of an investment. This is what is meant by the payback period.
Payback period versus discounted payback period versus net present value versus profitability index?
discounted payback period
Limitatios of payback period?
- the payback period is to dependent on cash inflows which are hard to predict. - The payback period only considers revenue, does not consider profits.
How is discounted payback period computed?
Payback period = Net Investment Annual cash returns
Criticism of payback period?
The basic criticisms of the payback period method are that it does not measure the profitability of an investment and it does not consider the time value of money.
What is the difference between payback and discounted payback?
Simple payback method do not care about the time-value of money principle while discounted payback period do take care of this principle in calculation.
What is the advantage and disadvantage of discounted payback method?
we only know the disadvantages: The cash flows beyond the payback period are ignored..
How to compute discounted payback period?
What is the payback period of the following project? Initial Investment: $50,000 Projected life: 8 years Net cash flows each year: $10,000
