Payback Period The payback period refers to the time needed to recover the cost of a given investment. In other words, it is the breakeven point period where the investment was recovered, and no profit was made yet. In capital budgeting, the payback period method enables managers and top ...
One of the biggest advantages of the payback period method is itssimplicity. The method is extremely simple to understand, as it only requires one straightforward calculation. Hence, it’s an easy way to compare several projects and then to choose the project that has the shortest payback time....
Definition: Payback period, also called PBP, is the amount of time it takes for an investment’s cash flows to equal its initial cost. In other words, it’s the amount of time it takes for an investment to pay for itself. This is an important time-based measurement because it shows ma...
Definition:ThePayback Periodhelps to determine the length of time required to recover the initial cash outlay in the project. Simply, it is the method used to calculate the time required to earn back the cost incurred in the investments through the successive cash inflows. ...
Some analysts favor the payback method for its simplicity. Others like to use it as an additional point of reference in a capital budgeting decision framework. Payback Period and Capital Budgeting The payback period ignores thetime value of money (TVM)unlike other methods of capital budgeting. Mon...
Discounted payback period is a capital budgeting method to calculate break even time or investment recovery time using discounted value
Some investments take time to bring in potentially higher cash inflows, but they will be overlooked when using the payback method alone. Another drawback to the payback period is that it doesn’t take the time value of money into account, unlike the discounted payback period method. This ...
Another advantage of this method is that it’s easy to calculate and understand. This makes it a good choice for decision-makers who don’t have a lot of experience with financial analysis. Disadvantages of Discounted Payback Period Discounted payback period calculation is a simple way to analyze...
Some investments take time to bring in potentially higher cash inflows, but they will be overlooked when using the payback method alone. Another drawback to the payback period is that it doesn’t take the time value of money into account, unlike the discounted payback period method. This ...
payback method the period it takes for anINVESTMENTto generate sufficient cash to recover in full its original capital outlay. For example, a machine that cost £1,000 and generated a net cash inflow of £250 per year would have a payback period of four years. See alsoDISCOUNTED CASH FL...