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 ?
The last section elaborates estimations of operation costs and payback periods for the CCHP economic analysis.
The energy production and payback periods for both flat plate and evacuated tube collectors were evaluated for 18 ethanol plant locations.
To make a proper judgment in the selection of equipment, all significant economic parameters must be considered: First costs, operating costs, interest rates on invested capital, inflation rate, desired payback period and equipment life have been selected for this study.
The predicted payback period for both measures was one year but payback was actually achieved within half that time, meaning the savings were boosting Glatfelter's bottom line in just six months.
The study also identified several technologies such as mild hybrid and flywheel hybrid for which the emission benefit was slightly smaller, but still significant at up to 20%, and with payback periods of less than four years.
Hence it is accepted that the returns are more linear and payback period is longer.
large projects, infrastructure projects and projects with long economic life and payback periods, require long-tenor financings and given the way the markets have been over the past two years they have found it tough to secure that with the banks.
Rather than a large-scale, expensive approach to energy management, by replacing antiquated boiler systems or installing triple-glazed windows or solar panels; these require significant investments and longer payback periods.
To help ease the burden, the government may furnish Transneft with financing for the project and tax breaks during the constrtiction and payback periods.
Payback periods typically range from six to eighteen months depending on the size of the installation and the operating schedule; most large installations tend to run 24hrs and show shorter payback periods.
The software presents clear and compelling data for the user, including estimated statistics on operating expenses, savings, payback periods, ROI and energy usage.