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)
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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.

Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson

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.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005

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.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.
References in periodicals archive ?
A new loan may increase or decrease your existing loan period. For example, if you have your existing loan for 15 more years, then refinancing for 10 years plan will allow you to get complete ownership of the house in lesser time.
Liverpool are adamant they want a transfer fee of around [pounds sterling]25m for the forward, but are prepared to write in a loan period with a guarantee of a payment in the summer.
The loan involves interest subsidy in the amount of approximately EUR298,000, the amount being affected by, inter alia, interest rate trends and the eventual loan period.
While Salah remained absent and silent, Fiorentina extended his loan period, and sent e1/41m to Chelsea, according to the previous agreement.
As the borrower thus decreases his bank debt to zero through installments over the first half of the loan period, he incurs a new, smaller debt to the PCH which serviced the loan's interest rate component on his behalf.
Deputy Head of the National Bank Kuat Kozhakhmetov explained that refinancing will be carried out via issuance of a new loan on the conditions of lower interest rates, as well as via changes in the currency of the loan and/or increase in the loan period.
KEVIN WILKIN is hopeful of bringing James Pearson back to the Racecourse for a longer loan period.
Celtic'striker Amido Balde's proposed loan move to former club Vitoria Guimaraes has fallen through neither club wants to pay his salary during the loan period.
"If it is going to be any longer than two or three months then the loan period is over," said Everton manager Roberto Martinez.
MOANS over a cut in the loan period for books topped the list of complaints at Birmingham's new library.
A spokesman for Birmingham YOU City Council said: "We have trialled a 21-day loan period, as used by many other services nationally, to enable customers to get books they have reserved more quickly and to improve the turnover of books on shelves.