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

or

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 maximum repayment period is 30 years, subject to an age limit.
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.
The 'Sunflower Business' scheme offers loans up to e1/4600,000 to businesses or local government bodies for setting up large-scale photovoltaic power-generation systems up to 500 kilowatts, at interest rates ranging from 2.8 to 3.75 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.
Many lenders had complained that 30-day repayment periods would hamper their cash flow and force them to draw back on their loans or close up shop altogether.
That means that the annual rate will be 5.5 percent, the repayment period 5 years and the grace period one year for investment projects.
Graduates face a "triple whammy" of more debt, higher interest rates and longer repayment periods if proposals to raise tuition fees are adopted, according to a study
Lending banks have agreed to prolong repayment periods for loans issued to Seventh Continent's core owner, Alexander Zanadvorov, against collateral of the retail chain's securities.
Dubai: Deyaar Development PJSC yesterday 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.
"The Moteri financing service is distinguished by easy repayment periods which the customer would be allowed to specify according to his or her financial status," he said.
The UAE Special Finance Scheme is available to eligible UAE nationals with regular source of income and will offer them finance amounts of up to Dh2 million and repayment periods of up to 156 months, he noted.
The Scottish Arts Council suggested the plan as they believe that small publishers are afraid of 'commercial' loans and should be offered loans at reduced rates over long repayment periods. The fund would be available to two companies per year who have a turnover of more than GBP250,000, reports The Bookseller.
NORTHERN Rock has fixed-rate mortgages from 10 to 15 years - and repayment periods up to 35 years will also help cash-strapped purchasers.