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 ?
95 per cent (with and without collateral, respectively) for loans up to e1/46,000, repayment periods up to seven years, and a six-month grace period.
The repayment period was what was considered fair and practical.
The bank will extend loans for long-term projects with a maximum size of three million euro and a repayment period of nine years.
Loans that complete the trial repayment period can be repurchased from Ginnie pools.
RENTING out a room can cut 29 months off the repayment period of an offset mortgage, says online bank first direct, launching a range of new offset mortgage deals.
The maximum repayment period henceforth, will be 48 months for expatriates.
Improved expectations on the outcome of the summit after comments from EU leaders for flexibility, reducing the interest rate (of bailout loans) and extending the repayment period are driving shares higher," analyst Nick Koskoletos at Eurobank Securities says.
The loan which is a sign of increased Chinese participation in the Iranian economy would have a repayment period of three to four years.
Beneficiaries will be given 5 million Iraqi dinars (ID) each at an interest rate of 6 percent with a repayment period of up to five years, Kadhem explained.
6 percent and the maximum repayment period is 10 years including a 5-year grace period, TAP said.
The repayment period will be up to 5 years with a grace period of up to 12 months and a highest interest rate of 6 percent annually.
Turkish Treasury Undersecretariat released a statement and said that IMF decided to make some modifications in its repayment period in its meeting held on March 24, 2009.