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 ?
" "There was an extension of the repayment period so that the payments would be smaller over time but this was the most difficult time also in terms of oureconomy.
For the short-term loans, ask for increment of the repayment period.
The loan repayment period is 20 years, including five years' grace period, with allocation to the Federation of BiH.
Non-collateral loans, low interest rates and long repayment period are among the strategies some of these firms are incorporating to increase their customer base.
Al Yusr, the Islamic Banking Window of Oman Arab Bank (OAB), has announced the launch of a new auto financing offer that provides Al Yusr Islamic Banking customers with an opportunity to obtain financing at competitive Murabaha rates, starting from just five per cent on reducing bases (equivalent to 2.8 per cent flat rate) and with a maximum repayment period of up to ten years.
Prolongation of the repayment period of the liabilities of the International Bank of Azerbaijan (IBA) will positively affect the investment portfolio of the United Accumulative Pension Fund of Kazakhstan, Saule Egeubaeva, deputy chairperson of the fund's board, said at a press conference on Jan.
The repayment period of these loans is up to 84 months, with the possibility of increasing the value of financing during the repayment period and the possibility of postponement of the installment up to three times per year.
"The loans totaled 222,000 euros on average, with an average repayment period of 5.5 years.
This provision applies to debts with a repayment period not exceeding seven years.
In addition, OAB sales representatives will be available in leading car dealerships across Muscat, Sohar and Salalah after Iftar from 8.30pm to midnight, for the duration of Ramadan, to answer customer queries about Markabati, advise them on the flexible payment plans, help them choose the repayment period that best suits their circumstances, and steer them through the fast-track application process to instant on-the-spot approval.
A shorter repayment period may be better than a slightly lower Annual Percentage Rate (APR) amount.