payback period

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Payback period

In project evaluation and capital budgeting, the payback period estimates the time required to recover the principal amount of an investment.  Because the payback period method ignores any benefits that occur after the investment is repaid and the time value of money, other methods of investment analysis are often preferred. See: Internal rate of return (IRR), Discounted cash flow (DCF), and Net present value (NPV)

Payback Period

The time between the first payment on a loan and its maturity. For example, if one takes out a student loan with a payback period of 10 years, the full amount of the loan is due 10 years after the first payment, which occurs on an agreed-upon date. Over the course of the payback period, a borrower must either pay back the loan with his/her own funds or take out a different loan to pay off the first. It is also called the premium recovery period. See also: Refinancing.

payback period

1. The length of time needed for an investment's net cash receipts to cover completely the initial outlay expended in acquiring the investment.
2. The number of years the higher interest income from a convertible bond (compared with the dividend income from an equivalent investment in the underlying common stock) must persist to make up for the amount above conversion value paid for the convertible. Also called premium recovery period.

payback period

a criterion used in INVESTMENT APPRAISAL to evaluate the desirability of an INVESTMENT project. Payback calculations involve measuring the CASH FLOWS associated with a project and indicate how long it takes for an investment to generate sufficient cash to recover in full its original capital outlay. For example, if a machine costs £5,000 to purchase at the start of year 1, then generates net cash inflows from the sale of products made by the machine of £5,000 in year 1 and £3,000 in year 2 then it would recoup the initial cash outlay in the first year. If a firm's target payback period for new investment projects was, say, two years or less, then this particular project would be undertaken.

Whether or not the machine pays back its initial outlay in one year depends upon how accurate the future estimates of sales volumes, selling prices, materials costs etc. turn out to be. Since all investments involve assessments of future re-venues and costs they are all subject to a degree of uncertainty. This problem, in part, can be handled by undertaking sensitivity analysis, by making not one but three estimates for each item of project cost or revenue (‘optimistic’, ‘most likely’, ‘pessimistic’) to indicate the range of possible outcomes.

payback period


payback method

the period it takes for an INVESTMENT to 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 also DISCOUNTED CASH FLOW, INVESTMENT APPRAISAL.

payback period

An estimate of the time that will be necessary for an investor to recoup the initial investment.It is used to compare investments that might have different initial capital requirements.

References in periodicals archive ?
The authority first decided to shorten the loan period to 21 days across all libraries in November last year, a decision that was initially made permanent following an annual review.
Hoyte has the unwanted tag of being relegated with both of today's derby rivals - with Sunderland in 2006 during a loan period from Arsenal and with Middlesbrough in 2009.
However, if you decide to pay off your debt before the end of the loan period, watch out for a redemption charge.
When he was on his initial loan period, Gregg did really well and fitted in with us as though he'd always been here.
But Chelsea are keeping Wolves waiting over whether they are prepared to let Mancienne go - either permanently or for another loan period.
The loanAAEs motto is focused on the concept of its availability during the year to the client throughout the loan period.
Padilla added City would have an option to buy Castillo once his loan period expires.
STEVE GUINAN made a happy return to Hereford - as he marked the first game of his loan period at the club with an impressive double.
By convention, mortgage lenders look for a design life that is at least twice as long as the length of the mortgage loan period i.
The loan agreement required Y to make monthly payments over the five-year loan period.
The average interest rate for the entire average loan period of 31 years is 2.
Stockport: C Nash set to return after loan period with Wolves.