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 ?
Payback periods were investigated for different operation hours and electricity prices.
Under the payback method of analysis, projects or purchases with shorter payback periods rank higher than those with longer paybacks.
The IRR and payback period shown in Exhibit 1 to the case can be verified using a calculator or Excel.
If the lower costs are applied to the findings of the original research, we find that the users will experience, on average, an approximately 30 per cent shorter payback period.
Japan * Higher interest rates * Low interest rates * Short planning * Long planning horizons horizons * Lower reliance on * High usage of payback periods payback periods * Companies demand * Companies accept high annual return lower annual return
When the annual cash flow varies, the payback period is the amount of time for the cumulative cash flows to equal the original investment.
2), The project's net present value (NPV) is positive; the internal rate of return (IRR) is very high; and the payback period is relatively short.
The study also indicated a simple payback period of approximately 18 months due to the combined lighting energy savings, and air conditioning savings due to the lowered heat output after the Axis DDH ballast was installed.
The rebate amounts are so substantial that in some cases the amount of the rebate can reduce the payback period to less than one year.
The study created a composite company based on interviews conducted with Altiris customers and determined that the ROI for this company would be 87 percent with a payback period within 13 months after deployment of Altiris products.
Based on its financing model, New Jersey has reduced the payback period for solar installation down to ten years or less.
2 million, with the average payback period to the City being 3.