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 ?
On the basis of payback period, IIM Ahmedabad scores over Harvard by two months.
The low investment, short payback periods, no capital outlay and minimal impact on tenants and building operations make GreenSmart, The Smart Path to Energy Reduction.
The payback period as calculated in the case ignores time value of money, and it ignores cash flows beyond the payback.
It's important to be able to calculate payback period and ROI using NPV so you can evaluate vendor proposals of technology payback.
The software presents clear and compelling data for the user, including estimated statistics on operating expenses, savings, payback periods, ROI and energy usage.
Justification of the required investment for a servo-motor pump drive may vary from case to case, but under average conditions it will seldom result in a short payback period.
Another frequently used measurement is to divide the aggregate attachment point by the savings (less related added expected losses and costs), using a payback period method.
The cash payback period is defined as the period of time required to recover the amount invested.
conclusions on the financial characteristics of the projects, expressed in terms of payback period and rate of return.
The San Francisco-based Solar Canopy Design/Builder to Offer Solar Installation Owners the Ability to Integrate Advertising Sales Programs to Drastically Improve ROI and Payback Period.
In the New York area, lighting upgrades generally have a payback period of less than one year.
Dividends from funding investments like this could have a 10-to 15-week payback period.