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 ?
75 per cent (depending on the borrower's own contribution to the project), a repayment period up to 12 years, and a 12-month grace period.
75 (depending on own contribution), and a 12-year repayment period.
Well since these loans may involve long repayment periods that make them potentially less secure and profitable, banks are unlikely to provide them without an incentive.
Seven years, 10 years, and 15 years are common repayment periods.
With repayment periods of up to four years coupled with annual deferral facilities, guaranteed instant cash back of AED 2,500 for all approved loans in excess of AED 150,000, individuals can enjoy one of the most flexible multipurpose personal loans available in the UAE.
On mainstay loans, the interest rates, with repayment periods of 21 to 35 years were lowered to between 1.
The new, longer repayment periods are not automatic; refugees must apply to become eligible.
The loan offer will also include flexible repayment periods, fast approval and will run from 22 October 2013 to 31 January 2014.
Additionally, the loan offer from the bank comes with flexible repayment periods and fast approval and run until January 31 next year.
The minimum amount of loan is AED 47,000 ($13,000)and the maximum AED 470,000 ($130,000) with repayment periods from 1 to 5 years.
Summary: Deyaar Development PJSC, a regional real estate company dedicated to innovation, customer care and long-term sustainable growth, today announced continued strategic partnerships with leading banks to offer highly competitive financing options exclusively to Deyaar customers, including up to 90 per cent financing and repayment periods of up to 25 years.